FDIC as Receiver for City Bank vs. Conrad D. Hanson and ...

Case 2:13-cv-00671 Document 1 Filed 04/15/13 Page 1 of 97 

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UNITED STATES DISTRICT COURT 

WESTERN DISTRICT OF WASHINGTON 

AT SEATTLE 

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FEDERAL DEPOSIT INSURANCE 

CORPORATION AS RECEIVER FOR CITY 

BANK, 

v. 

Plaintiff, 

CONRAD D. HANSON AND CHRISTOPHER 

B. SHEEHAN, 

Defendants. 

Case No. 

COMPLAINT 

JURY TRIAL DEMANDED 

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Plaintiff, the Federal Deposit Insurance Corporation as Receiver for City Bank, 

Lynnwood, Washington ("FDIC-R"), for its Complaint states as follows: 

I. INTRODUCTION 

1. The FDIC-R seeks to recover damages resulting from the negligence, gross 

negligence, and breaches of fiduciary duty of former City Bank officers Conrad D. Hanson 

("Hanson")1 and Christopher B. Sheehan ("Sheehan") (collectively, "Defendants"). 

2. Defendants breached their fiduciary duties to City Bank and were negligent and 

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Hanson was also a director of City Bank, but the FDIC-R is suing him in his capacity as a 

former officer of City Bank. 

COMPLAINT - Page 1 

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grossly negligent by, among other things, approving, in violation of the City Bank Loan Policy 

("Loan Policy") and prudent, safe, and sound lending practices, at least 26 loans between May 

2005 and October 2008 ("Loans"). 

3. The Defendants' negligence, gross negligence, and breaches of their fiduciary 

duties caused damages to City Bank. Defendants are jointly and severally liable in an amount to 

be proven at trial, but not less than $41 million, for the damages the Bank suffered, which 

includes loss of operating capital, lost investment opportunities, and losses incurred on the Loans 

that were approved in violation of prudent lending practices and the Bank's Loan Policy. 

II. PARTIES 

A. Plaintiff 

4. Plaintiff is the Federal Deposit Insurance Corporation ("FDIC") in its capacity as 

Receiver for City Bank (or the "Bank"), pursuant to 12 U.S.C. §§ 1811-1835a. The FDIC is a 

federal banking agency, 12 U.S.C. § 1811(a), and the FDIC, as receiver, is charged with the 

orderly liquidation of failed banks, 12 U.S.C. § 1821(c)(2)(A)(ii). 

5. On April 16, 2010, the Washington State Department of Financial Institutions 

("WDFI") closed the Bank, and the FDIC-R was appointed as receiver. At that time, the 

FDIC-R succeeded to all rights, titles, and privileges of the Bank and its depositors, account 

holders, and stockholders. 12 U.S.C. § 1821(d)(2)(A)(i). 

B. Defendants 

6. Hanson founded the Bank and served as the Bank's President from at least 

December 15, 1989, until December 31, 2009. From January 15, 2006, until December 31, 

2009, Hanson also served as the Bank's Chief Executive Officer. Hanson served on the Bank's 

Board of Directors (the "Board") from the Bank's founding in April 1974 until it closed. At the 

Bank's closure, Hanson was Chairman of the Board, and he owned approximately 1,765,403 

shares or 10.99 percent of the Bank's stock. 

7. Sheehan was the Assistant Vice President of the Real Estate Department from 

March 1, 1978, until November 30, 1989. From December 1, 1989, until January 14, 2004, he 


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was the Senior Vice President and Manager of the Real Estate Department. From January 15, 

2004, until the Bank closed, Sheehan was the Executive Vice President of the Construction Loan 

Department. When the Bank closed, Sheehan owned approximately 211,762 shares or 1.32 

percent of the Bank's stock. 

III. JURISDICTION AND VENUE 

8. This Court has subject matter jurisdiction over this case pursuant to 12 U.S.C. 

§ 1819(b)(1) and (2); 12 U.S.C. § 1821(d) and (k); and 28 U.S.C. §§ 1331 and 1345. 

9. This Court has personal jurisdiction over Defendants, who at all relevant times 

were residents of and conducted the business of the Bank in the State of Washington. 

10. Venue is proper in this District under 28 U.S.C. § 1391(b) because a substantial 

portion of the events and/or omissions giving rise to the claims and damages asserted herein 

occurred in this District. 

IV. FACTUAL BACKGROUND 

A. History of City Bank 

11. Hanson founded City Bank as a state-chartered nonmember institution on 

October 23, 1973. The Bank began operations on April 15, 1974. At the time of the Bank's 

closing, it was headquartered in Lynnwood, Washington and had eight branches in south 

Snohomish County and north King County. The Bank pursued a community banking business 

plan that was centered on commercial real estate ("CRE") and, in particular, acquisition, 

development, and construction ("ADC") lending. 

12. By the end of 2005, City Bank's loan portfolio was heavily concentrated in ADC 

loans as compared to its peer banks. In December 2005, the Bank's ADC loans equaled 233 

percent of total capital, compared to 104 percent of total capital among the Bank's peer group. 

The Bank's ADC loan concentrations continued to increase, and as of December 2006, 

December 2007, and December 2008, the Bank's ADC loan concentrations were 329 percent, 

391 percent, and 421 percent of total capital, respectively. Those numbers significantly outpaced 

the Bank's peer group, which experienced ADC concentrations of 136 percent, 147 percent, and 




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139 percent over that same time period, respectively. By December 2009, the Bank's percentage 

of ADC loans compared to total capital had increased to 689 percent, compared to an ADC 

concentration of 97 percent among the Bank's peer group. 

13. Rather than exercising caution as they plunged the Bank deeper and deeper into 

ADC lending, Defendants instead relied upon informal and autocratic procedures to approve 

loans. Hanson and Sheehan stated to Bank underwriting personnel that City Bank was the "bank 

of last resort" and that City Bank was "doing deals no one else would." In addition, Hanson and 

Sheehan told Bank underwriting personnel that the two of them "knew the dirt" and did not need 

appraisals. 

14. Coinciding with the Bank's increasing concentration in CRE and ADC loans, 

Defendants knew or should have known of the warnings about the impending real estate market 

decline and the risks that a steep decline posed for the Bank's loan portfolio. As early as the first 

quarter of 2006, Defendants had received articles and reports warning that the housing boom had 

peaked (the "Real Estate Bubble") and that the dramatic rise in housing prices in the Pacific 

Northwest had set the stage for a decline in the real estate market. The Real Estate Bubble burst 

in the middle of 2006, and housing prices began to collapse beginning in the third quarter of 

2006. Despite the bursting of the Real Estate Bubble, Hanson and Sheehan continued to approve 

loans without regard to whether the borrowers or guarantors could repay the loans or whether the 

collateral was sufficient to secure the loans. 

15. By the fourth quarter of 2007, Hanson and Sheehan knew that City Bank was 

foreclosing on three home builders who were customers of the Bank's Construction Loan 

Department. In addition, they knew that there was a slowdown in the Bank's Residential 

Mortgage Department and that, in November 2007, the Residential Mortgage Department was 

"running at a breakeven pace." However, these effects of the Real Estate Bubble's implosion 

were not enough to convince Hanson and Sheehan to tighten the Bank's ADC lending standards. 

16. On or about September 5, 2008, Hanson wrote to the Board, "I've stated survival 

has been the primary concern for everyone in financial markets including regulators for the past 




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11/2 years. I expect it to continue as individuals and business continue to fail." (Emphasis in 

original). On or about October 3, 2008, Hanson wrote another memorandum to the Board, titled 

"SURVIVE or VAPORIZE," in which he stated, "In my opinion any 'type of loan' in Ethel 

current economic environment could be considered on a watch list, substandard, impaired or 

loss!" (Emphasis in original). Nonetheless, Hanson and Sheehan approved two of the Loans 

about two weeks after Hanson sent this memorandum to the Board. 

B. Regulatory Guidance and Warnings 

17. The Bank was subject to the supervision of the FDIC and WDFI. Examiners from 

the FDIC and/or WDFI conducted regular examinations of the Bank and provided a Report of 

Examination to the Bank's Board and senior management at the conclusion of each examination. 

The FDIC, separately and jointly with other federal banking agencies, also promulgated banking 

regulations and issued policy statements, guidance, and advisory letters. 

18. On October 8, 1998, the FDIC issued Financial Institution Letter 110-98 ("FIL 

110-98"), which warned financial institutions of the risks inherent in ADC lending in a favorable 

real estate market, including an oversupply of developed property. Among other things, FIL 

110-98 stated that "ADC lending is a highly specialized field with inherent risks that must be 

managed and controlled to ensure that this activity remains profitable." 

19. On December 12, 2006, the Office of the Comptroller of the Currency, the FDIC, 

and the Board of Governors of the Federal Reserve System jointly issued "Concentrations in 

Commercial Real Estate Lending, Sound Risk Management Practices" ("Joint Guidance"), which 

specifically warned banks that "[c]oncentrations of credit exposure add a dimension of risk that 

compound the risk inherent in individual loans." The Joint Guidance provided that banks with 

"[t]otal reported loans for construction, land development, and other land [i.e., ADC loans] 

represent[ing] 100 percent or more of the institution's total capital" were potentially exposed to 

significant concentration risk. 

20. From 2005 until the Bank closed, the regulators repeatedly told the Bank's Board 

and management that the Bank had ongoing safety and soundness deficiencies that needed to be 




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corrected. 

21. For example, in 2005, the examiners noted that almost all of City Bank's loans for 

the construction of single-family residences ("SFR") had loan-to-value ("LTV") ratios that 

exceeded the supervisory LTV limit set forth in the Interagency Guidelines for Real Estate 

Lending, 12 C.F.R. app. A to subpt. A of pt. 365 ("Interagency Guidelines"). Since at least 

1993, the supervisory LTV limits for real estate loans under the Interagency Guidelines have not 

changed and are as follows: 65 percent for raw land, 75 percent for land development, 80 percent 

for commercial, multifamily, and other nonresidential construction, 85 percent for one- to fourfamily 

residential construction, and 85 percent for improved property. Loans with LTV ratios in 

excess of the supervisory LTV limit must be identified in a bank's records, and the aggregate 

amount of all loans with LTV ratios above their respective supervisory LTV limits must be 

reported at least quarterly to the bank's board of directors. In addition, the Interagency 

Guidelines provide that the aggregate amount of all loans with LTV ratios above their 

supervisory LTV limits should not exceed 100 percent of a bank's total capital. In 2005, the 

examiners warned the Board and senior management that the aggregate amount of City Bank's 

loans with excessive LTV ratios was 305 percent of total capital. As a result of this high 

percentage, the examiners warned City Bank's management that they would be subject to 

increased scrutiny. 

22. In addition, the examiners recommended that the Bank's management implement 

prompt, comprehensive appraisal reviews to ensure sufficient value in real estate collateral 

because the examiners found that the Bank's appraisal review function appeared to be 

perfunctory in nature and to be performed after loans were committed. 

23. In 2005, the examiners also recommended to City Bank's Board and senior 

management that management establish minimum liquidity guidelines for construction loan 

borrowers. In a memorandum to the Board in May 2006, Sheehan dismissed this 

recommendation, noting that "putting liquidity constraints on the builders we finance would 

subsequently decrease their chances for success." 




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24. In 2006, the Bank's management continued to be in violation of the Interagency 

Guidelines in two respects. First, City Bank's Loan Policy permitted loan commitments of up to 

80 percent of the appraised retail value for speculative SFR construction projects as opposed to 

using the regulatory threshold of 85 percent of the discounted value. Second, the aggregate 

amount of the Bank's loans with LTV exceptions amounted to 336 percent of the Bank's total 

capital. The Interagency Guidelines provide that this aggregate amount should not exceed 100 

percent of total capital. With respect to the Bank's risk management policies and practices, it 

was recommended that management enhance the loan memorandums and loan presentations so 

that the memorandums and presentations would provide a sufficient analysis of the borrowers 

and the borrowers' construction projects. 

25. In the fourth quarter of 2007, the Bank's senior management was warned that the 

Bank's risk management processes were inadequate in relation to current economic conditions 

and the Bank's asset concentrations. Once again, the Bank's aggregate amount of SFR 

construction loans with LTV ratio exceptions was unacceptably high at 310 percent of the 

Bank's total capital. This was the third time in three years that the Bank's management had been 

cited for this same violation. The Bank's management had also been cited for contraventions of 

the FDIC's Real Estate Lending Standards, 12 C.F.R. pt. 365, for at least five consecutive years. 

Sheehan responded to these criticisms by admitting that the Bank simply would not be in 

compliance with the regulatory limit on the concentration of loans with LTV exceptions because 

the Bank's management purposely concentrated the Bank's loan portfolio in SFR construction 

loans with LTV ratios in excess of the supervisory limit. In a post-examination letter to the 

regulators, Hanson concurred with Sheehan, noting that "The higher than normal concentration 

of commercial real estate loans (CRE) in general and development/construction loans in 

particular is intentional based on management experience and expertise in this area and the 

returns that are available." Despite repeated regulatory warnings, Hanson and Sheehan refused 

to change City Bank's business plan to make the Bank's concentration of SFR construction loans 

comply with the FDIC's Real Estate Lending Standards. 




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26. Also in the fourth quarter of 2007, the regulators noted two appraisal violations. 

Under the FDIC's regulations regarding real estate appraisals, 12 C.F.R. pt. 323, appraisals must 

analyze and report appropriate deductions and discounts for proposed construction projects and 

tract developments with unsold units. Not all of City Bank's appraisals for ADC loans contained 

a discounted value. In addition, the FDIC, along with other federal agencies, required banks to 

perform a compliance review on every appraisal, prior to the final credit decision, to ensure that 

the appraisal complied with the applicable appraisal regulations. Nevertheless, City Bank's 

management allowed appraisal reviews to be conducted after the loans were originated. 

Although this practice contravened applicable regulations, Hanson defiantly informed the 

regulators that the Bank's Construction Loan Department would not require the completion of an 

appraisal review for every loan prior to "loan booking." 

27. Noting the Bank's high concentration in CRE loans in 2007, the Bank's 

management was warned that they should implement minimum standards for borrower net 

worth, property cash flow, and debt service coverage for CRE properties. A federal regulator 

verbally warned Hanson, Sheehan, and other Bank management that, while earnings remained 

positive at the time, City Bank was effectively driving 80 mph in a 60 mph zone, and it needed to 

slow down. 

28. By the first quarter of 2009, the Bank's condition had deteriorated significantly 

and the overall condition of the Bank was unsatisfactory. City Bank was formally designated as 

troubled, thereby triggering closer regulatory supervision. The Bank's significant concentration 

in ADC loans, combined with the deterioration in the real estate market, resulted in a precipitous 

rise in delinquent and non-performing assets. The Board and management were directly 

responsible for the poor quality of assets and the excessive concentration in ADC loans. The 

Bank's management pursued high returns while ignoring prudent risk management practices. In 

particular, the Bank's management continued to originate new ADC loans in the second and 

third quarters of 2008 and engaged in high-risk lending practices, despite a rapidly deteriorating 

real estate market. For the sixth consecutive examination, the total loans with LTV exceptions 




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exceeded the limit of 100 percent of the Bank's total capital. In addition, the Bank's 

management was systemically unwilling to comply with the applicable rules and regulations 

regarding real estate appraisals. 

29. The Bank's loan underwriting continued to be unsatisfactory. The Bank's credit 

memorandums were criticized for not adequately addressing the financial capacities of borrowers 

and guarantors to carry construction loans to term and for omitting critical information, such as 

project feasibility. 

30. Finally, the repetitive nature of the violations and contraventions of the FDIC's 

rules and regulations reflected poorly on the Board and management. In addition, these repeated 

violations reflected a cavalier attitude towards regulatory compliance. 

31. On June 29, 2009, the FDIC and WDFI issued a Cease and Desist Order to City 

Bank. In early 2010, the overall condition of the Bank was critically deficient and the Bank was 

deteriorating rapidly due to an excessive level of nonperforming ADC loans. On March 10, 

2010, the FDIC issued the Bank a Prompt Corrective Action ("PCA") directive. City Bank was 

unable to comply with the recapitalization requirements of the PCA and failed on April 16, 2010. 

C. Hanson's and Sheehan's Compensation and Other Financial Benefits 

32. From 2006 through 2008, Hanson received an exorbitantly high level of 

compensation for which there was no justification. For 2006, 2007, and 2008, Hanson received 

performance bonuses equal to $1,650,000, $2,000,000 and $50,000, respectively. These bonuses 

were in addition to Hanson's base salary for that period, which equaled $544,416, $600,000, and 

$650,000, respectively. Hanson also received approximately $50,000 in 2008 for his service on 

the Board. 

33. As early as September 2006, Hanson made his expectations with respect to his 

compensation clear to the Board. That month, he wrote, "Let's Cut To The Chase! Here are the 

guidelines, I now propose for amending our compensation for year 2006. . . . Conrad Hanson's 

cash bonus and salary - $1,600,000 and $600,000, respectively." He continued, "However 

saying that I think it's important you know that if the group thinks my request and 




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recommendation are inappropriate for any reason, I'M PREPARED TO STEP DOWN! If you 

want to negotiate compensation, I will hire an attorney if that gives you comfort in your ultimate 

decision to put the proper graphs in our proxy statement, etc." Then, he challenged the Board, 

"I'm asking each of you individually to also examine if you're comfortable with my style . . . 

because it has now worked for +/- 32 years. If you are of the opinion and uncomfortable, some 

third party might take issue with the business of the bank, you also can resign. If the heat in the 

kitchen gets too hot, it might be best to get out of the kitchen." 

34. For 2006, 2007, and 2008, Sheehan received performance bonuses equal to 

$266,000, $316,000, and $71,000, respectively. These bonuses were in addition to Sheehan's 

base salary for that period, which equaled $158,108, $170,108, and $182,108, respectively. 

D. City Bank's Loan Policy 

35. During the relevant time period, City Bank's General Loan Policy (the "Loan 

Policy") provided standards that applied to all loans originated by City Bank. Periodically, the 

Board approved amendments to the Loan Policy. The version of the Loan Policy that was 

approved by the Board on or about November 10, 2004 (the "November 10, 2004 Loan Policy") 

is the earliest version of the Loan Policy that is relevant to this case. Subsequent amendments to 

the Loan Policy were made and approved by the Board on or about June 8, 2005, March 8, 2006 

(the "March 8, 2006 Loan Policy"), May 10, 2006, June 12, 2007, October 10, 2007 (the 

"October 10, 2007 Loan Policy"), January 9, 2008 (the "January 9, 2008 Loan Policy"), and 

October 9, 2008 (the "October 9, 2008 Loan Policy"). References to Defendants' failures to 

enforce, comply, or follow the standards or requirements in the Loan Policy are to the standards 

or requirements that were in effect at the time of Defendants' violation of the Loan Policy or 

their failure to enforce the Loan Policy. 

36. The Loan Policy provided that a "loan comment memo ["Loan Memo"] must be 

completed in detail for every loan made over $50,000 . . ., signed by the lending officer, and 

placed in the borrower's credit file." 

37. The November 10, 2004 Loan Policy provided maximum LTV ratios for real 




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estate transactions as follows: 65 percent for raw land loans, 75 percent for land development 

loans, 80 percent for "commercial, multi-family, and other non-residential" construction loans, 

85 percent for "[o]ne-to-four family residential" construction loans, and 85 percent for improved 

property loans. The March 8, 2006 Loan Policy reduced the maximum LTV ratios for one- to 

four-family residential construction and improved property loans from 85 percent to 80 percent. 

38. The October 10, 2007 Loan Policy added a definition of the term "value" that was 

to be used in calculating LTV ratios. The definition was "the lesser of appraised value or 

purchase price (cost)." This same definition of "value" was in the January 9, 2008 Loan Policy 

and the October 9, 2008 Loan Policy. 

39. During the time period that is relevant to this case, the Loan Policy provided, "All 

loans are generally to be supported by primary and secondary sources of repayment." The 

January 9, 2008 Loan Policy and the October 9, 2008 Loan Policy further provided: 

Potential borrowers should be able to demonstrate a net worth that 

is appropriate to the amount requested. . . . The actual amount and 

composition of the borrower's net worth is a significant factor in 

the loan underwriting process. A net worth that is composed of 

liquid assets is more desirable than one that is made up of 

leveraged illiquid assets. 

40. For ADC loans, the Loan Policy, at all relevant times, permitted collateral to be 

the primary source of repayment. The Loan Policy further provided that "[a]ll secured loans 

should have an ample margin of safety between the advance and the current market value of the 

collateral." In addition, collateral was "not a substitute for credit analysis and [collateral's] most 

important attribute is marketability." 

41. In addition, ADC loan applications were "reviewed for marketability by 

reviewing current sales of comparable product in the area." This review was "accomplished by 

loan officer site review, customer information submitted, and discussions with established real 

estate agent relationships." 

42. The Loan Policy provided that the "PRIMARY PRINCIPAL FACTORS TO BE 

CONSIDERED" when analyzing a loan application were: 




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a. the adequacy of the loan amount in relation to the applicant's needs and 

repayment ability; 

b. the purpose and maturity date of the loan; 

c. credit and/or trade reports; 

d. for businesses, the management's integrity, capacity, capability, depth, 

and succession; 

e. complete financial information, including the debt-to-worth ratio for 

business borrowers, which was not to exceed 4 to 1 unless an exception 

was "addressed in the loan comment memo"; and 

f. for lines of credit, "historical financial information indicating sufficient 

cash flow to service the requested debt." 

43. The Loan Policy also required all loan applications to "be supported by all the 

pertinent financial statements, budgets, credit reports, loan comments, etc., so that the request 

c[ould] be properly analyzed." 

44. For construction loans, the loan officer was required to complete a loan officer 

approval analysis form ("Loan Officer Analysis"). A Loan Officer Analysis for a particular 

project would contain information on the purchase price of the land, if applicable, and on the 

hard and soft costs of the project. In addition, the Loan Officer Analysis would show the 

expected sales price, the total loan amount, and the projected profit for the borrower. 

45. The Loan Policy required City Bank "to have an appraisal prepared by a State 

licensed or certified appraiser for ALL real estate related transaction" unless the "transaction 

involve[d] an existing extension of credit, provided that: a. there has been no obvious and 

material change in the market conditions . . . ; or b. there [wa]s no advancement of new monies 

other than funds necessary to cover reasonable closing costs." The Loan Policy listed other 

exceptions from the appraisal requirement, but the other exceptions are not relevant to this case. 

46. The Loan Policy also required an appraisal compliance checklist for all loans 

secured by real estate. The checklist was to be "completed by the approving loan officer and 



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reviewed by the special credits officer." 

47. Pursuant to the Loan Policy, the Board assigned "a 'loan limit' to the President 

and each loan officer." These limits were recorded in a document called "Officer Lending 

Limits." The Loan Policy stated, "Loan limit authorities include all direct and contingent 

liability and commitments to any one borrower. . . . Full discretion is permitted within loan limit 

or reporting authorities, provided such loans are in accordance with established loan policy." 

The loan approval limits for Hanson and Sheehan changed over time. 

48. From March 10, 2004, until May 31, 2005, Hanson's approval authority was up to 

the legal lending limit of the Bank, which was "apprx. $31,000,000." Sheehan's approval 

authority was "$2,000,000 individually or $4,000,000 with Mark Taylor and Bryan Boyle (R/E 

only)." During the period from March 10, 2004, to May 31, 2005, the Officer Lending Limits 

stated that lain construction related single family loans, multi-family loans (1-4 units) and 

condominium loans (up to 30 units); can be approved by Chris Sheehan up to $2,000,000 or with 

Mark Taylor and Bryan Boyle signatures up to $4,000,000." The Officer Lending Limits further 

provided, "Land development loans (up to 50 lots) can be approved up to $4,000,000 with the 

signature of Chris Sheehan, Mark Taylor and Bryan Boyle." In addition, "[f]uture advance loans 

up to $100,000 for any one borrower c[ould] be approved by Chris Sheehan." 

49. From June 1, 2005, until January 10, 2006, Hanson's approval authority was up to 

the legal lending limit of the Bank, which was "apprx. $31,000,000." Sheehan's approval 

authority was "$2,000,000 individually or $4,000,000 with Mark Taylor and Bryan Boyle (WE 

only)." During the period from June 1, 2005, to January 10, 2006, the Officer Lending Limits 

stated that "[a]ll construction related single family loans, multi-family loans (1-4 units) and 

condominium loans (up to 30 units); can be approved by Chris Sheehan up to $3,000,000 or with 

Mark Taylor and/or Bryan Boyle signatures up to $4,000,000." The Officer Lending Limits 

further provided, "Land development loans (up to 50 lots) can be approved up to $4,000,000 

with the signature of Chris Sheehan, Mark Taylor and Bryan Boyle." In addition, "[f]uture 

advance loans up to $100,000 for any one borrower c[ould] be approved by Chris Sheehan (R/E 




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only)." 

50. From January 11, 2006, until December 11, 2007, Hanson's approval authority 

was up to the legal lending limit of the Bank, which was "apprx. $35,000,000." Sheehan's 

approval authority was "$3,000,000 individually or $5,000,000 with Mark Taylor and Bryan 

Boyle (R/E only)." During the period from January 11, 2006, to December 11, 2007, the Officer 

Lending Limits stated that construction related single family loans, multi-family loans (1-4 

units) and condominium loans (up to 30 units); can be approved by Chris Sheehan up to 

$3,000,000 or with Mark Taylor and/or Bryan Boyle signatures up to $5,000,000." The Officer 

Lending Limits further provided, "Land development loans (up to 50 lots) can be approved up to 

$4,000,000 with the signature of Chris Sheehan, Mark Taylor and Bryan Boyle." In addition, 

"[f]uture advance loans up to $100,000 for any one borrower c[ould] be approved by Chris 

Sheehan (R/E only)." 

51. From December 12, 2007, until February 12, 2008, Hanson's approval authority 

was up to the legal lending limit of the Bank, which was "apprx. $42,000,000." Sheehan's 

approval authority for real estate loans did not change during this period of time. 

52. For the remaining period of time that is relevant to this case, Hanson's approval 

authority did not change. Sheehan's approval authority was "$3,000,000 individually or 

$5,000,000 with Mark Cole and Bryan Boyle (R/E only)." During the remaining period, the 

Officer Lending Limits stated that "[a]ll construction related single family loans, multi-family 

loans (1-4 units) and condominium loans (up to 30 units); can be approved by Chris Sheehan up 

to $3,000,000 or with Mark Cole and/or Bryan Boyle signatures up to $5,000,000." The Officer 

Lending Limits further provided, "Land development loans (up to 50 lots) can be approved up to 

$4,000,000 with the signature of Chris Sheehan, Mark Cole and Bryan Boyle." In addition, 

"[f]uture advance loans up to $100,000 for any one borrower c[ould] be approved by Chris 

Sheehan (R/E only)." 

E. Defendants Caused the Bank to Incur Damages 

53. Defendants are liable for the damages that they caused the Bank to suffer. In this 


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lawsuit, the FDIC-R seeks to collect damages flowing from Hanson's and Sheehan's negligence, 

gross negligence, and breaches of fiduciary duties. The loan transactions set forth below 

illustrate the very types of failures, breaches, and violations of duty committed by Hanson and 

Sheehan, resulting in damages to the Bank. The FDIC-R seeks compensatory damages and other 

relief as a result of Defendants' conduct, including as described below. 

Borrower A2 (I) 

54. On or about May 24, 2005, Hanson and Sheehan approved a land acquisition and 

development loan for $3,098,625 to Borrower A (the "Borrower A (I) Loan"). 

55. Between June 2005 and February 2009, the Bank disbursed approximately 

$2,933,358 of the Borrower A (I) Loan. 

56. The Loan Memo for the Borrower A (I) Loan stated that the purpose of the loan 

was to fund the acquisition and development of a proposed plat, consisting of 20 lots for SFRs 

and one existing SFR in Bothell, Washington. 

57. The Loan Memo provided that the repayment source was to be the sale of the 

finished lots. Although the Loan Memo did not state that the assets of any guarantors provided a 

secondary source of repayment, the Loan Memo contained a section titled "Guarantor Financial 

Information," which included financial information on the guarantors of the Borrower A (I) Loan 

("Guarantors A-1 and A-2"), who were the principals of Borrower A. On or about June 2, 2005, 

Guarantors A-1 and A-2 each separately executed an unlimited personal guaranty for all existing 

and future indebtedness owed by Borrower A to City Bank. 

58. The security for the Borrower A (I) Loan was to be a deed of trust to real estate in 

Snohomish County, Washington. 

59. Hanson and Sheehan engaged in imprudent, unsafe, and unsound lending 

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2 Borrowers A, B, C, D, E, F, G, H, I, J, K, L, M, and N referenced herein represent individual borrowers or limited 

liability companies that were closely held by individual principals. The names of these borrowers and LLCs have 

been withheld to protect the privacy of the individual borrowers and principals, but will be provided once an 

appropriate protective order is in place. Similarly, pseudonyms have been used for the principals and guarantors 

who were involved in the transactions described herein. 




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practices and/or violated the Loan Policy when they approved the Borrower A (I) Loan because 

they, among other things: 

a. Failed to perform or insist upon an analysis of Borrower A's ability to 

repay the Borrower A (I) Loan. There was nothing in the Bank's 

Borrower A (I) Loan file to indicate that any analysis or verification was 

performed on the borrower's reported income, assets, liabilities, or net 

worth. 

b. Failed to perform or insist upon an analysis of Guarantors A-1 and A-2's 

ability to repay the Borrower A (I) Loan. There was nothing in the Bank's 

Borrower A (I) Loan file to indicate that any analysis or verification was 

performed on the guarantors' reported incomes, assets, liabilities, or net 

worth. 

c. Failed to enforce or require compliance with the Loan Policy's debt-toworth 

limit of 4 to 1. The Loan Memo stated that Borrower A's business 

liabilities were $5,913,264 and its net worth was $362,654, resulting in a 

debt-to-worth ratio of 16.3 to 1. 

d. Failed to obtain or require a written appraisal before they approved this 

loan. The Loan Memo stated, "Valuation is being prepared in narrative 

form . . . . Verbal values were received on 5/24/05 with hard copy to 

follow." 

60. In or about March 2009, Borrower A defaulted on the loan. 

61. Hanson's and Sheehan's acts and omissions with respect to the Borrower A (I) 

Loan caused City Bank to incur damages in an amount to be proved at trial. Had Hanson and 

Sheehan followed prudent, safe, and sound lending practices and the Loan Policy, the Bank 

would not have made the Borrower A (I) Loan, and the resulting damages would not have 

occurred. 




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Borrower A (II) 

62. On or about August 21, 2006, Hanson and Sheehan approved a land acquisition 

loan for $13,300,000 to Borrower A (the "Borrower A (II) Loan"). The Loan Memo for this loan 

showed that City Bank had already made loans with an aggregate commitment of over $22.8 

million to Borrower A and the related entities of Guarantors A-1 and A-2 when Defendants 

approved the Borrower A (II) Loan. Three of those loans, notes 1149-910984-008, 1149- 

910984-009, and 1149-910984-011 ("Notes 008, 009, and 011"), had already been fully 

disbursed, and their combined outstanding balance was $723,750. 

63. On or about December 5, 2006, Hanson and Sheehan approved a land 

development modification to the Borrower A (II) Loan that provided additional funding of 

$7,895,000 for the Borrower A (II) Loan (the "Borrower A (II) Modification"). The Loan Memo 

for this modification showed that City Bank had already made loans with an aggregate 

commitment of over $35.3 million to Borrower A and the related entities of Guarantors A-1 and 

A-2 when Defendants approved the Borrower A (II) Modification. The Loan Memo further 

provided that there was to be a holdback of $6,695,000 on this modification that was to be 

released when Borrower A paid off note 1149-910984-010 ("Note 010"), which had an 

outstanding balance of over $9.1 million. 

64. Between August 2006 and October 2008, the Bank disbursed all $21,195,000 of 

the Borrower A (II) Loan and Borrower A (II) Modification. 

65. The Loan Memo for the Borrower A (II) Loan stated that the purpose of the loan 

was to fund the acquisition of 22.5 acres of land in Lynnwood, Washington for development into 

a 120-lot plat. The Loan Memo also provided that "proceeds from the subject loan will pay off 

CityBank Notes#008, 009 & 011." Including additional interest due, the pay-off amounts for 

Notes 008, 009, and 011 were $215,164.49, $251,640.29, and $261,702.59, respectively. The 

Loan Memo for the Borrower A (II) Modification stated that the purpose of the loan 

modification was to fund the development of the 120-lot plat. 

66. The Loan Memos for the Borrower A (II) Loan and the Borrower A (II) 




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Modification provided that the repayment source was to be the sale of the finished lots upon 

completion of development improvements. Although the Loan Memos did not state that the 

assets of any guarantors provided a secondary source of repayment, the Loan Memos included 

the financial information of Guarantors A-1 and A-2, who had each executed an unlimited 

personal guaranty for all existing and future indebtedness owed by Borrower A to City Bank. 

67. The security for the Borrower A (II) Loan and the Borrower A (II) Modification 

was to be the project's 120 lots. 


practices and/or violated the Loan Policy when they approved the Borrower A (II) Loan and the 

Borrower A (II) Modification because they, among other things: 

a. Failed to require Borrower A to contribute any hard equity to the 

acquisition of the 22.5 acres. The purchase price of the land was only 

$11,367,450, which was less than the $13.3 million commitment of the 

Borrower A (II) Loan. The Loan Memo did not explain why the borrower 

needed the extra $1,932,550, nor did the Loan Memo explain why the 

borrower was not contributing any hard equity to the acquisition of the 

land. 

b. Failed to require Borrower A to contribute any meaningful amount of hard 

equity to the development of the lots. The Loan Memo for the Borrower 

A (II) Loan provided that City Bank would provide a note increase in the 

future of "approximately $8,500,000" in development funds to "give a 

total project cost of $21,800,000." The entire $21.8 million of the total 

project cost was to be funded by the Borrower A (II) Loan of $13.3 

million and a future note increase of approximately $8.5 million. In other 

words, when Defendants approved the Borrower A (II) Loan, the Loan 

Memo showed that Borrower A would not have to contribute any equity to 

the acquisition and development of these 120 lots. The Loan Memo for 




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the Borrower A (II) Modification provided that the total estimated cost for 

the project was $21,500,000, which was only $305,000 more than the 

combined amount of the Borrower A (II) Loan and Modification. Even if 

Borrower A contributed this $305,000 to the development of the lots, 

Borrower A's hard equity in the project was still only 1.4 percent of the 

total cost. 

c. Failed to consider or knew of and disregarded Borrower A's inability to 

repay the Borrower A (II) Loan. The Loan Memo for the Borrower A (II) 

Loan provided that Borrower A had cash on hand of only $327,803. The 

Loan Memo also showed that City Bank's total loan commitment to 

Borrower A, including the Borrower A (II) Loan, was more than $26.2 

million. Borrower A's cash was only 1.2 percent of this aggregate loan 

commitment. The value of Borrower A's assets was listed at $13,571,877, 

but 96.6 percent or $13,115,196 of those assets consisted of illiquid real 

estate inventory and fixed assets. In addition, the Loan Memo showed that 

Borrower A had already reached its credit limit on Notes 008, 009, and 

011 for a total principal amount due of $723,750. Although the Loan 

Memo noted that this amount would be paid off with proceeds from the 

Borrower A (II) Loan, the Loan Memo did not explain why this refinancing 

was necessary for this relatively small amount. The fact that 

Borrower A wanted to borrow $13.3 million even though it apparently 

needed re-finance $723,750 was a red flag to Hanson and Sheehan. In 

addition, when Defendants approved the Borrower A (II) Loan, the Real 

Estate Bubble was bursting. Nonetheless, Defendants approved the 

Borrower A (II) Loan even though Borrower A could not repay the loan 

with its own liquid assets. 

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d. Failed to enforce or require compliance with the Loan Policy's debt-toworth 

limit of 4 to 1 for the Borrower A (II) Loan. The Loan Memo for 

the Borrower A (II) Loan stated that Borrower A's business liabilities 

were $12,101,530 and its net worth was $1,470,347, resulting in a debt-toworth 

ratio of 8.2 to 1. 

e. Failed to consider or knew of and disregarded Borrower A's inability to 

repay the Borrower A (II) Modification. The Loan Memo for the 

Borrower A (II) Modification provided that Borrower A had a net worth of 

only $187,621 and cash on hand of $1,428,802. The Loan Memo also 

showed that City Bank's total loan commitment to Borrower A, including 

the Borrower A (II) Modification, was more than $33.4 million. Borrower 

A's cash was only 4.3 percent of this aggregate loan commitment. The 

value of Borrower A's assets was listed at $36,898,521, but 97 percent or 

$35,774,398 of those assets consisted of illiquid real estate inventory and 

fixed assets. With liabilities of $36,710,900, Borrower A's debt-to-worth 

ratio was 195.7 to 1, which violated the Loan Policy's debt-to-worth ratio 

limit of 4 to 1. In addition, Defendants knew that Borrower A had used 

proceeds from the Borrower A (II) Loan to repay Notes 008, 009, and 011. 

All of these facts were red flags to Hanson and Sheehan. Moreover, when 

Defendants approved the Borrower A (II) Modification, the Real Estate 

Bubble was bursting. Nonetheless, Defendants approved the Borrower A 

(II) Modification even though Borrower A had insufficient liquid assets to 

repay the modified loan. 

f. Failed to perform or insist upon an analysis of Guarantors A-1 and A-2's 

ability to repay the Borrower A (II) Loan and Borrower A (II) 

Modification. Both Loan Memos listed the guarantors' assets at 

$34,125,323, but 83.7 percent or $28,549,695 of that amount was illiquid 




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equity in various closely-held companies and real estate holdings. In 

addition, when Defendants approved the Borrower A (II) Modification, 

the guarantors' related entities' loan commitments from City Bank, 

including the Borrower A (II) Loan and Modification, plus the guarantors' 

personal liabilities totaled $43,320,507. The guarantors had $3,921,722 in 

cash on hand, but the guarantors' and borrower's combined cash 

amounted to only 12.4 percent of the guarantors' personal liabilities plus 

City Bank's loan commitments. Guarantors A-1 and A-2 had insufficient 

cash to repay the Borrower A (II) Loan and Modification, and there was 

nothing in the Bank's files to indicate that any analysis was performed on 

the guarantors' ability to repay all of their debt. No analysis was 

performed on the guarantors' ability to repay all of their debt even though 

the Real Estate Bubble was imploding when Defendants approved the 

Borrower A (II) Loan and Modification. 

g. Failed to consider or knew of and disregarded the LTV ratio limit 

violation of the Borrower A (II) Loan. FDIC guidance provided that the 

value of the collateral in an acquisition loan was the lesser of the actual 

acquisition cost and the appraised market value. Although the appraised 

as-is value was $18,000,000, the actual acquisition cost of the 22.5 acres 

was only $11,367,450. Based on actual cost, the LTV ratio of the 

Borrower A (II) Loan was 117 percent, which greatly exceeded the 

supervisory limit and the Loan Policy's limit of 65 percent for acquisition 

loans. 


70. Hanson's and Sheehan's acts and omissions with respect to the Borrower A (II) 

Loan and the Borrower A (II) Modification caused City Bank to incur damages in an amount to 

be proved at trial. When Hanson and Sheehan approved this loan and the subsequent 


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modification, the Real Estate Bubble was bursting. Because the real estate market was 

collapsing and repayment of the Borrower A (II) Loan and Borrower A (II) Modification 

depended upon the sale of the 120 lots, Defendants' exercise of due care was especially 

important, and yet Defendants failed to require the borrower to contribute a meaningful amount 

of hard equity to the project; they failed to consider the borrower's and guarantors' inability to 

repay their debts; they disregarded the LTV ratio violation for the Borrower A (II) Loan; and 

they did not enforce the Loan Policy's debt-to-worth ratio limit. Had Hanson and Sheehan 

followed prudent, safe, and sound lending practices and the Loan Policy, the Bank would not 

have made the Borrower A (II) Loan or the Borrower A (II) Modification, and the resulting 

damages would not have occurred. 

Borrower A (III) 

71. On or about April 22, 2008, Hanson and Sheehan caused or allowed the Bank to 

disburse $2,455,502 of a line of credit and refinancing loan that was made to Borrower A in the 

amount of $3,200,000 (the "Borrower A (III) Loan"). On or about April 24, 2008, Sheehan 

approved the Borrower A (III) Loan. On or about April 28, 2008, Hanson approved the 

Borrower A (III) Loan. The Loan Memo for this loan showed that City Bank had already made 

loans with an aggregate commitment of over $34.1 million to the related entities of Guarantors 

A-1 and A-2 when Defendants approved the Borrower A (III) Loan. 

72. Between April 2008 and November 2008, the Bank disbursed all $3,200,000 of 

the Borrower A (III) Loan. 

73. The Loan Memo for the Borrower A (III) Loan stated that the purpose of the loan 

was to provide funds for cost overruns and interest carry. However, the Loan Memo also stated 

that the Borrower A (III) Loan would be used to pay off City Bank Note 010, which was the 

same note that needed to be paid off in order to release the holdback on the Borrower A (II) 

Modification. The Loan Memo provided that the outstanding balance of Note 010 was 

$2,418,000. The purpose of Note 010 was to fund the development of a 54-lot subdivision. 

Borrower A sold 34 of the lots in or about May 2007, but from April 2007 until the Loan Memo 




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was prepared in April 2008, Borrower A was unable to sell the remaining 20 lots. 

74. The Loan Memo provided that the primary source of repayment was to be the 

income from Borrower A and that the secondary source of repayment was to be the assets of the 

guarantors. 

75. The Loan Memo provided that the security for the Borrower A (III) Loan was to 

be a first lien on the property that was the collateral for Note 010. 


practices and/or violated the Loan Policy when they approved the Borrower A (III) Loan because 


a. Failed to consider or knew of and disregarded Borrower A's inability to 

repay the Borrower A (III) Loan, even though the January 9, 2008 Loan 

Policy stressed the importance of liquidity in the composition of net worth. 

The Loan Memo for the Borrower A (III) Loan provided that Borrower 

A's income was to be the primary source of repayment. The Loan Memo 

also showed that Borrower A's self-reported annual income through 

December 31, 2007, was $1,697,405, but the term of the Borrower A (III) 

Loan was only six months. In addition, the Loan Memo provided that 

Borrower A had a net worth of negative $12,089 and cash on hand of only 

$122,421. The Loan Memo also showed that City Bank's total loan 

commitment to Borrower A before the Borrower A (III) Loan was more 

than $24.2 million. Borrower A's cash was only 0.5 percent of this loan 

commitment. Borrower A's liabilities totaled $46,525,021, and 

Defendants knew that Borrower A could not repay Note 010, which had 

an outstanding balance of $2,418,000. Given that the Real Estate Bubble 

had burst more than 21 months before Defendants approved the Borrower 

A (III) Loan and that Borrower A had been unable to sell the 20 lots that 

were the collateral for the Borrower A (III) Loan during the preceding 12 




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months, there was no realistic possibility that Borrower A's income from 

April to October 2008 would be sufficient to repay the $3.2 million 

Borrower A (III) Loan, and the primary source of repayment, therefore, 

was inadequate. 

b. Failed to consider or knew of and disregarded Guarantors A-1 and A-2's 

inability to repay the Borrower A (III) Loan, even though the January 9, 

2008 Loan Policy stressed the importance of liquidity in the composition 

of net worth. Although the guarantors' assets were listed at $26,123,642, 

79.1 percent or $20,664,204 of that amount was illiquid equity in various 

closely-held companies and real estate holdings. In addition, City Bank's 

loan commitments to the guarantors' related entities before the Borrower 

A (III) Loan plus the guarantors' personal liabilities totaled $38,054,972. 

The Loan Memo provided that the guarantors had $3,921,722 in cash on 

hand, which oddly was the same exact amount of cash listed in the Loan 

Memo for the Borrower A (II) Loan from August 2006. The guarantors' 

signed personal financial statements that were in the Bank's files painted a 

very different picture of the guarantors' financial status. Their combined 

cash and cash equivalents totaled only $856,841—not $3.9 million. The 

guarantors' and borrower's combined cash amounted to only 2.6 percent 

of the guarantors' personal liabilities plus City Bank's loan commitments. 

When Defendants approved the Borrower A (III) Loan, the Real Estate 

Bubble had burst, and the guarantors had insufficient liquid assets to repay 

the Borrower A (III) Loan. 

c. Failed to consider or knew of and disregarded the LTV ratio limit 

violation of the Borrower A (III) Loan. Applicable regulations provided 

that the supervisory LTV ratio for a development loan or a loan for 

finished lots was 75 percent. The Loan Policy also provided that the 




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maximum LTV ratio for land development loans was 75 percent. The 

Loan Memo stated that the LTV ratio of the Borrower A (III) Loan was 80 

percent, based on the appraised value of $4,000,000. This LTV ratio 

exceeded the Loan Policy's limit and the supervisory limit. The LTV ratio 

based on discounted value was even worse. The appraisal provided a 

discounted value of $3,801,000, which results in an LTV ratio of 84.2 

percent. 


limit of 4 to 1. The Loan Memo showed that Borrower A had a net 

worth of negative $12,089, and, therefore, the borrower's debt-to-worth 

ratio was not within the Loan Policy's limit. 


78. Hanson's and Sheehan's acts and omissions with respect to the Borrower A (III) 

Loan caused City Bank to incur damages in an amount to be proved at trial. When Hanson and 

Sheehan approved this loan, the Bank had initiated foreclosure proceedings against at least three 

construction loan borrowers, and the Real Estate Bubble had burst more than 21 months earlier. 

Because of these negative indicators and because repayment of the Borrower A (III) Loan 

depended upon the sale of the 20 lots, Defendants' exercise of due care was especially important, 

and yet Defendants failed to consider the borrower's and guarantors' inability to repay their 

debts even though the borrower's income and the guarantors' assets were the primary and 

secondary sources of repayment, respectively; Defendants disregarded the loan's excessive LTV 

ratio which violated the Loan Policy and the supervisory LTV ratio limit; and they did not 

enforce the Loan Policy's debt-to-worth ratio limit. Had Hanson and Sheehan followed prudent, 

safe, and sound lending practices and the Loan Policy, the Bank would not have made the 

Borrower A (III) Loan, and the resulting damages would not have occurred. 

Borrower B (I) 

79. On or about March 28, 2007, Sheehan approved a construction loan for 



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$13,256,000 to Borrower B (the "Borrower B (I) Loan"). On or about March 29, 2007, Hanson 

approved the Borrower B (I) Loan. 

80. The Loan Memo for the Borrower B (I) Loan stated that the purpose of the loan 

was to fund the construction of 40 SFRs in Bothell, Washington. Borrower B was also planning 

on using proceeds of the Borrower B (I) Loan to purchase the land for the 40 SFRs. By about 

August 4, 2008, Borrower B had sold 18 of the 40 SFRs. 

81. On or about August 22, 2008, Sheehan approved a modification to the Borrower 

B (I) Loan that provided additional funding of $186,150 to cover cost overruns on nine of the 

SFRs and a total loan commitment of $7,495,750 for all 22 remaining unsold SFRs, including the 

nine with cost-overruns (the "Borrower B (I) Modification"). On or about August 29, 2008, 

Defendants caused or allowed City Bank to disburse all of the additional funding of $186,150. 

On or about September 3, 2008, Hanson approved the Borrower B (I) Modification. The Loan 

Memo for this modification showed that City Bank had already made loans with an aggregate 

commitment of over $14.3 million to Borrower B when Defendants approved the Borrower B (I) 

Modification. 

82. Between March 2007 and October 2009, the Bank disbursed approximately 

$11,969,737 of the Borrower B (I) Loan and Borrower B (I) Modification. 

83. The Loan Memos provided that the repayment source was to be the sale of the 

collateral. The Loan Memos also listed the same guarantor for the Borrower B (I) Loan and 

Modification ("Guarantor B"). 

84. The security for the Borrower B (I) Loan and Borrower B (I) Modification was to 

be the project's SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower B (I) Loan and 

Borrower B (I) Modification because they, among other things: 

a. Failed to require Borrower B to contribute any hard equity to the project. 

The Loan Memo and the Loan Officer Analyses for the Borrower B (I) 




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Loan showed that the estimated total cost of the project, inclusive of 

interest and financing-related fees and expenses, was $13,256,000, which 

was exactly the approved amount of the Borrower B (I) Loan. Borrower 

B, therefore, was not required to contribute any equity to the project's 

costs. Based on the Loan Memo for the Borrower B (I) Modification, the 

estimated combined lot and hard costs of the remaining 22 SFRs were 

$7,042,002, which was less than the total loan amount of $7,495,750. 

Thus, after the Borrower B (I) Modification, Borrower B still did not need 

to contribute any hard equity to the lots or hard costs of this project. 

b. Failed to consider or knew of and disregarded Borrower B's inability to 

repay the Borrower B (I) Loan. The Loan Memo for the Borrower B (I) 

Loan provided two different balances of cash and cash equivalents for 

Borrower B—$346,225 and $403,061. Neither amount was nearly enough 

to support the Borrower B (I) Loan. In addition, the Loan Memo showed 

that Borrower B's total assets equaled only $3,786,968 and its net worth 

was only $911,876. When Defendants approved the Borrower B (I) Loan, 

the Real Estate Bubble was bursting, and the borrower had insufficient 

liquid assets to repay the Borrower B (I) Loan. 

c. Failed to consider or knew of and disregarded Borrower B's inability to 

repay the Borrower B (I) Modification, even though the January 9, 2008 

Loan Policy stressed the importance of liquidity in the composition of net 

worth. The Loan Memo for the Borrower B (I) Modification provided two 

different balances of cash and cash equivalents for Borrower B—$333,917 

and $426,786. Neither amount was nearly enough to support the total loan 

commitment of the Borrower B (I) Modification. Although Borrower B's 

total assets were listed at $10,466,949, 93.1 percent or $9,748,914 of that 

amount was tied up in illiquid real estate holdings. In addition, Borrower 




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B's debt-to-worth ratio was 5.8 to 1, which exceeded the Loan Policy's 

limit of 4 to 1. When Defendants approved the Borrower B (I) 

Modification, the Real Estate Bubble had burst about 26 months earlier, 

and the borrower had insufficient liquid assets to repay the Borrower B (I) 

Modification. 

d. Failed to consider or knew of and disregarded Guarantor B's inability to 

repay the Borrower B (I) Loan. The Loan Memo showed that Guarantor B 

had a net worth of $1,727,514. However, $1,109,000 of Guarantor B's 

assets was illiquid equity in Borrower B and real estate holdings. The 

Loan Memo listed two different cash amounts for Guarantor B—$679,514 

and $334,740. Even if Guarantor B had a cash balance of $679,514, that 

amount plus Borrower B's cash was only 6.0 percent of the guarantor's 

liabilities plus City Bank's loan commitments to Borrower B, including 

the Borrower B (I) Loan. When Defendants approved the Borrower B (I) 

Loan, the Real Estate Bubble was bursting, and the guarantor had 

insufficient liquid assets to repay the Borrower B (I) Loan. 

e. Failed to consider or knew of and disregarded Guarantor B's inability to 

repay the Borrower B (I) Modification, even though the January 9, 2008 


worth. The Loan Memo for the Borrower B (I) Modification showed that 

Guarantor B had a net worth of $1,165,388. The Loan Memo did not 

include Guarantor B's equity in Borrower B as an asset, nor did the Loan 

Memo explain this omission. As in the Borrower B (I) Loan Memo, the 

Loan Memo for the modification listed two different cash amounts for 

Guarantor B—$724,388 and $87,253. Even if Guarantor B had a cash 

balance of $724,388, that amount plus Borrower B's cash was only 7.8 

percent of the guarantor's liabilities plus City Bank's loan commitments to 



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Borrower B, including the Borrower B (I) Modification. When 

Defendants approved the Borrower B (I) Modification, the Real Estate 

Bubble had burst, and the guarantor had insufficient liquid assets to repay 

the Borrower B (I) Modification. 

f. Failed to consider or knew of and disregarded the LTV ratio limit 

violation of the Borrower B (I) Loan. The supervisory LTV ratio limit for 

a residential construction loan was 85 percent. The Loan Memo stated 

that the LTV ratio of the Borrower B (I) Loan was 80 percent, based on 

aggregate retail value. The LTV ratio based on the discounted value of 

$14,970,000 was 88.6 percent, which exceeded the supervisory LTV ratio 

limit of 85 percent. When Defendants approved the Borrower B (I) 

Modification, City Bank's January 9, 2008 Loan Policy provided that, for 

purposes of the LTV ratio, "Value shall be defined as the lesser of 

appraised value or purchase price (cost)." The Loan Policy further 

provided that the LTV ratio limit for residential construction loans was 80 

percent, which was less than the supervisory LTV ratio for SFR 

construction loans of 85 percent. The Loan Memo for the Borrower B (I) 

Modification listed the average lot price as $200,000 and the average hard 

costs per SFR as $120,091. For the 22 SFRs included in the Borrower B 

(I) Modification, the estimated combined lot and hard costs were 

$7,042,002. The Loan Memo for the Borrower B (I) Modification listed 

the total loan amount for the 22 SFRs to be $7,495,750. Thus, the LTV 

ratio of the Borrower B (I) Modification was 106.4 percent based on the 

project's estimated total lot and hard costs. This LTV ratio violated the 

Loan Policy's limit and the supervisory limit. 

86. In or about January 2009, Borrower B defaulted on the loan. 

87. Hanson's and Sheehan's acts and omissions with respect to the Borrower B (I) 




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Loan and Borrower B (I) Modification caused City Bank to incur damages in an amount to be 

proved at trial. When Hanson and Sheehan approved the Borrower B (I) Loan, the Real Estate 

Bubble was bursting, and when they approved the Borrower B (I) Modification, the Bank had 

initiated foreclosure proceedings against at least three construction loan borrowers, and the Real 

Estate Bubble had burst more than 26 months earlier. Because of these negative indicators and 

because repayment of the Borrower B (I) Loan and Borrower B (I) Modification depended upon 

the sale of the 40 SFRs, Defendants' exercise of due care was especially important, and yet 

Defendants failed to require the borrower to contribute any hard equity to the project; they failed 

to consider the borrower's and guarantor's inability to repay their debts; they disregarded the 

LTV ratio limit violations; and they failed to enforce the Loan Policy's limit on the borrower's 

debt-to-worth ratio for the Borrower B (I) Modification. Had Hanson and Sheehan followed 

prudent, safe, and sound lending practices and the Loan Policy, the Bank would not have made 

the Borrower B (I) Loan or the Borrower B (I) Modification, and the resulting damages would 

not have occurred. 

Borrower B (II) 

88. On or about February 19, 2008, Sheehan approved a construction loan for 

$5,928,800 to Borrower B (the "Borrower B (II) Loan"). On or about February 20, 2008, 

Hanson approved the Borrower B (II) Loan. The Loan Memo for this loan showed that City 

Bank's loan commitments to Borrower B, including the Borrower B (II) Loan, totaled over $17.6 

million. 

89. Between February 2008 and November 2009, the Bank disbursed approximately 

$5,746,724 of the Borrower B (II) Loan. 

90. The Loan Memo for the Borrower B (II) Loan stated that the purpose of the loan 

was to fund the construction of 21 SFRs in Lake Stevens, Washington. Borrower B was also 

planning on using the proceeds of the Borrower B (II) Loan to purchase the land for the 21 SFRs. 

91. The Loan Memo provided that the primary source of repayment was to be the sale 

of the collateral and that the secondary source of repayment was to be the assets and income of 


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the guarantor. 

92. The Loan Memo provided that the security for the Borrower B (II) Loan was to be 

the project's 21 SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower B (II) Loan because 


a. Failed to require Borrower B to contribute any hard equity to the project. 

The Loan Memo and the Loan Officer Analyses for the Borrower B (II) 


interest and financing-related fees and expenses, was $5,583,421. 

Defendants approved the Borrower B (II) Loan for $5,928,800. Borrower 

B, therefore, was not required to contribute any equity to this project. 

b. Failed to consider or knew of and disregarded Borrower B's inability to 

repay the Borrower B (II) Loan, even though the January 9, 2008 Loan 


The Loan Memo provided two different balances of cash and cash 

equivalents for Borrower B—$104,669 and $426,786. Neither amount 

was nearly enough to support the Borrower B (II) Loan. Although 

Borrower B's total assets were listed at $10,466,949, 93.1 percent or 

$9,748,914 of that amount was tied up in illiquid real estate holdings. In 

addition, Borrower B's debt-to-worth ratio was 5.8 to 1, which exceeded 

the Loan Policy's limit of 4 to 1. When Defendants approved the 

Borrower B (II) Loan, the Real Estate Bubble had burst about 20 months 

earlier, and the borrower had insufficient liquid assets to repay the 

Borrower B (II) Loan. 

c. Failed to consider or knew of and disregarded Guarantor B's inability to 

repay the Borrower B (II) Loan, even though the January 9, 2008 Loan 




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The Loan Memo showed that City Bank's loan commitments to Borrower 

B, including the Borrower B (II) Loan, plus Guarantor B's personal 

liabilities totaled $17,830,400. The Loan Memo listed two different cash 

amounts for Guarantor B—$724,388 and $155,842. Even if Guarantor B 

had a cash balance of $724,388, that amount plus Borrower B's cash was 

only 6.5 percent of the guarantor's liabilities plus City Bank's total loan 

commitments to Borrower B. When Defendants approved the Borrower B 

(II) Loan, the Real Estate Bubble had burst, and the guarantor had 

insufficient liquid assets to repay the Borrower B (II) Loan. 

d. Failed to consider or knew of and disregarded the LTV ratio limit 

violation of the Borrower B (II) Loan. The Bank's January 9, 2008 Loan 

Policy provided that, for purposes of the LTV ratio, "Value shall be 

defined as the lesser of appraised value or purchase price (cost)." The 

Loan Policy further provided that the LTV ratio limit for SFR construction 

loans was 80 percent, which was less than the supervisory LTV ratio limit 

for single-family residential construction loans of 85 percent. Given the 

loan amount of $5,928,800 and the estimated aggregate cost of the 

construction project of $5,583,421, the LTV ratio of the Borrower B (II) 

Loan was 106.2 percent. This LTV ratio violated the Loan Policy's limit 

and the supervisory limit. 

94. In or about March 2009, Borrower B defaulted on the loan. 

95. Hanson's and Sheehan's acts and omissions with respect to the Borrower B (II) 



construction loan borrowers, and the Real Estate Bubble had burst about 20 months earlier. 

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depended upon the sale of the 21 SFRs, Defendants' exercise of due care was especially 

important, and yet Defendants failed to require the borrower to contribute any hard equity to the 

project; they failed to consider the borrower's and guarantor's inability to repay their debts; they 

disregarded the LTV ratio limit violation; and they failed to enforce the Loan Policy's limit on 

the borrower's debt-to-worth ratio. Had Hanson and Sheehan followed prudent, safe, and sound 

lending practices and the Loan Policy, the Bank would not have made the Borrower B (II) Loan, 

and the resulting damages would not have occurred. 

Borrower C 

96. On or about May 4, 2007, Hanson and Sheehan approved a construction loan for 

$3,975,200 to Borrower C (the "Borrower C Loan"). The Loan Memo for this loan showed that, 

including the Borrower C Loan, City Bank's aggregate loan commitment to the related entities of 

the guarantors of the Borrower C Loan ("Guarantors C-1 and C-2") was $31,764,400. 

97. Between May 2007 and February 2009, the Bank disbursed approximately 

$2,157,102 of the Borrower C Loan. 

98. The Loan Memo for the Borrower C Loan stated that the purpose of the loan was 

to fund the construction of nine SFRs in Kent, Washington. 



the guarantors. 

100. The security for the Borrower C Loan was to be the project's nine SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower C Loan because 


a. Failed to require Borrower C to contribute hard equity to the project. The 

Loan Memo for the Borrower C Loan listed the average lot price as 

$190,000 and the average hard costs per SFR as $224,289. For all nine 

SFRs, the estimated combined lot and hard costs were $3,728,601, which 




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was almost $250,000 less than the amount of the Borrower C Loan. 

Borrower C, therefore, did not need to contribute any equity to the lots or 

hard costs of this construction project. 

b. Failed to consider or knew of and disregarded Borrower C's inability to 

repay the Borrower C Loan. The Loan Memo showed that City Bank's 

total loan commitment to Borrower C, including the Borrower C Loan, 

was more than $8.5 million. Borrower C's cash balance equaled only 5.2 

percent of this aggregate loan commitment. The Loan Memo also 

provided that Borrower C's net worth was only $1,273,756. Although the 

Loan Memo listed the value of Borrower C's assets at $21,900,429, 97.8 

percent or $21,410,055 of those assets appeared to consist of illiquid real 

estate inventory and fixed assets. When Defendants approved the 

Borrower C Loan, the Real Estate Bubble had burst more than 10 months 


Borrower C Loan. 

c. Failed to perform or insist upon an analysis of Guarantors C-1 and C-2's 

ability to repay the Borrower C Loan. When Defendants approved the 

Borrower C Loan, City Bank's loan commitments to the guarantors' 

related entities, including the Borrower C Loan, totaled $31,764,400, and 

the guarantors' total liabilities were $91,805,366. The guarantors had 

$3,520,377 in cash on hand, but the guarantors' and borrower's combined 

cash amounted to only 4.3 percent of the guarantors' liabilities. No 

analysis was performed on the guarantors' ability to repay all of their 

related entities' loans even though the Real Estate Bubble had burst when 

Defendants approved the Borrower C Loan. This analysis was especially 

important because Guarantor C-1, who was responsible for almost all of 

the combined net worth and liquid assets of the two guarantors, had just 




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asked for an extension on the deadline to repay a construction loan 

covering ten SFRs. 


violation of the Borrower C Loan. The supervisory LTV ratio limit for a 

residential construction loan was 85 percent. The Loan Memo stated that 

the discounted value of the collateral was $4,000,000, which results in an 

LTV ratio of 99.4 percent. 

e. Failed to enforce or require compliance with the Loan Policy's debt-toworth 

limit of 4 to 1. The Loan Memo showed that Borrower C had 

business liabilities of $20,626,673 and a net worth of $1,273,756, resulting 

in a debt-to-worth ratio of 16.2 to 1. 

102. In or about January 2009, Borrower C defaulted on the loan. 

103. Hanson's and Sheehan's acts and omissions with respect to the Borrower C Loan 

caused City Bank to incur damages in an amount to be proved at trial. When Hanson and 

Sheehan approved this loan, the Real Estate Bubble had burst more than 10 months earlier. 

Because the real estate market had collapsed and repayment of the Borrower C Loan depended 

upon the sale of the nine SFRs, Defendants' exercise of due care was especially important, and 

yet Defendants failed to consider the borrower's and guarantor's inability to repay their debts; 

they disregarded the LTV ratio violation of the supervisory limit; they failed to require any hard 

equity in the project; and they failed to enforce the Loan Policy's limit on the borrower's debt-toworth 

ratio. Had Hanson and Sheehan followed prudent, safe, and sound lending practices and 

the Loan Policy, the Bank would not have made the Borrower C Loan, and the resulting damages 

would not have occurred. 

Borrower D 

104. On or about June 6, 2007, Sheehan approved a construction loan for $13,776,800 

to Borrower D (the "Borrower D Loan"). On or about June 7, 2007, Hanson approved the 

Borrower D Loan. The Loan Memo for this loan showed that City Bank had already made loans 




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with an aggregate commitment of over $11 million to an entity ("Related Entity D") that was 

related to Borrower D. 

105. Between June 2007 and October 2008, the Bank disbursed all of the Borrower D 

Loan. 

106. The Loan Memo for the Borrower D Loan stated that the purpose of the loan was 

to fund the construction of 25 zero-lot-line townhomes located in the Capitol Hill area of Seattle. 

A zero-lot-line townhome is a townhome that has at least one exterior wall built right on the 

property line. The Loan Memo also provided that a portion of the proceeds of the Borrower D 

Loan would be used to repay an acquisition and construction loan from First Horizon Bank. The 

Loan Memo did not reveal the balance of the loan held by First Horizon Bank, but the 

Disbursement Request and Authorization for the Borrower D Loan, dated June 7, 2007, provided 

that $5,000,000 was to be paid to Fidelity National Title on Borrower D's behalf. 


of the units and that the secondary source of repayment was to be the assets and income of the 

guarantors. 

108. The security for the Borrower D Loan was to be the project's 25 townhomes. 


practices and/or violated the Loan Policy when they approved the Borrower D Loan because 


a. Failed to consider or knew of and disregarded the fact that the amount of 

the Borrower D Loan exceeded the project's hard costs and the cost of the 

land by more than $4 million. The Loan Memo showed that the estimated 

combined hard costs and cost of the lots totaled $9,598,896. The 

Borrower D Loan, however, was a commitment of $13,776,800. The 

Loan Memo did not explain how Borrower D was going to use the extra 

$4,177,904—which amounted to 43.5 percent of the estimated lot and 

construction costs. The excessive amount of the Borrower D Loan made it 




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unnecessary for Borrower D to contribute any hard equity to this 

construction project. 

b. Failed to perform or insist upon an analysis of the borrower's ability to 

repay all of its debt, including the Borrower D Loan. The Loan Memo 

contained conflicting information about Borrower D's liabilities that 

Hanson and Sheehan should have resolved. On the one hand, the Loan 

Memo listed Borrower D's assets and liabilities at $0, noting that 

Borrower D was "a new entity formed specifically to build out the subject 

townhomes. Financial consideration is derived from the statemen[ts] of 

the guarantors." On the other hand, the Loan Memo stated, "The subject 

loans will pay off an acquisition/construction loan facilitated for the 

borrowers by First Horizon Bank. The borrowers also have a loan secured 

by the subject property to an outside investor . . . in the amount of 

$1,346,525.32. This loan will remain in place, and will be subordin[a]te 

to the subject loan." In addition, the Loan Memo provided that "the 

borrower has additional lending relationships with Homestreet Bank, 

Frontier Bank, First Horizon Bank, Rainier Capital Group, and Seattle 

Savings." Simply put, it was impossible for Borrower D to have an ADC 

loan from First Horizon Bank, a second loan of over $1.3 million from 

Rainier Capital Group, five lending relationships outside of City Bank, 

and zero dollars in liabilities. These inconsistencies were apparent on the 

face of the Loan Memo and stood as red flags to Hanson and Sheehan. 

Defendants, however, failed to insist upon an analysis of Borrower D's 

ability to repay its debts, including the Borrower D Loan. 

c. Failed to consider or knew of and disregarded the guarantors' inability to 

repay the Borrower D Loan. According to the Loan Memo, the guarantors 

of the Borrower D Loan ("Guarantors D-1, D-2, D-3, and D-4") had 




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combined personal liabilities of $9,145,039. That amount plus City 

Bank's commitment of $11,036,000 to Related Entity D and the Borrower 

D Loan totaled $33,957,839. The guarantors' combined cash and cash 

equivalents equaled only $2,294,179, which was approximately 6.8 

percent of their total related debt and City Bank loan commitments. 

Although the guarantors' assets were listed at $36,090,127, 81.9 percent or 

$29,554,900 of that amount was illiquid equity in various closely-held 

companies and real estate holdings. When Defendants approved the 

Borrower D Loan, the Real Estate Bubble had burst more than 11 months 

earlier, and Guarantors D-1, D-2, D-3, and D-4 had insufficient liquid 

assets to repay the Borrower D Loan. 


violation of the Borrower D Loan. The supervisory LTV ratio limit for a 

multi-family residential construction loan was 80 percent. The Loan 

Memo stated that the discounted value of the collateral was $15,352,035, 

which results in an LTV ratio of 89.7 percent. 

e. Failed to obtain or require a written appraisal before they approved this 

loan. The Loan Memo stated, "Valuation of the property was prepared in 

narrative form . . . . Verbal values were received on 6/04/07 with hard 

copy to follow." Sheehan and Hanson approved the Borrower D Loan on 

June 6, 2007, and June 7, 2007, respectively. The appraiser's cover letter 

for the appraisal is dated June 20, 2007. 

f. Failed to enforce or require compliance with the Loan Policy's debt-toworth 

limit of 4 to 1. The Loan Memo showed that Borrower D had $0 in 

business assets and liabilities. Therefore, Borrower D did not have a debtto-worth 

ratio that complied with the Bank's Loan Policy. 

110. In or about January 2009, Borrower D defaulted on the loan. 




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111. Hanson's and Sheehan's acts and omissions with respect to the Borrower D Loan 



Because the real estate market had collapsed and repayment of the Borrower D Loan depended 

upon the sale of the 25 townhomes, Defendants' exercise of due care was especially important, 

and yet Defendants failed to require the borrower to contribute any hard equity to the project; 

they failed to consider or analyze the borrower's debts; they disregarded the guarantors' inability 

to repay their related debts; they disregarded the LTV ratio violation; they did not obtain a 

written appraisal prior to approving the Borrower D Loan; and they failed to enforce the Loan 

Policy's debt-to-worth ratio limit. Had Hanson and Sheehan followed prudent, safe, and sound 

lending practices and the Loan Policy, the Bank would not have made the Borrower D Loan, and 

the resulting damages would not have occurred. 

Borrower E 

112. On or about August 21, 2007, Hanson and Sheehan approved a construction loan 

for $7,518,400 to Borrower E (the "Borrower E Loan"). 

113. Between August 2007 and October 2008, the Bank disbursed approximately 

$6,482,841 of the Borrower E Loan. 

114. The Loan Memo for the Borrower E Loan stated that the purpose of the loan was 

to fund the construction of 28 SFRs in a planned residential development in Lake Stevens, 

Washington. 


of the collateral and that the secondary source of repayment was to be the income and assets of 


116. The security for the Borrower E Loan was to be the project's 28 SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower E Loan because 





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a. Failed to require Borrower E to contribute hard equity to the project. The 

Loan Memo for the Borrower E Loan listed the average lot price as 

$105,000 and the average hard costs per SFR as $137,908. For all 28 

SFRs, this totaled $6,801,424, which was less than the amount of the 

Borrower E Loan. Borrower E did not need to contribute any equity to the 

lots or hard costs of this construction project. 

b. Failed to perform or insist upon an analysis of the guarantors' abilities to 

service all of their respective debt, including the Borrower E Loan. 

Borrower E was a single-purpose entity with no financial history, so 

Defendants had to rely entirely on the financial strength of the guarantors. 

Although the Loan Memo included financial information for the 

guarantors of the Borrower E Loan ("Guarantors E-1, E-2, and E-3"), the 

Loan Memo did not contain any analysis of the ability of Guarantor E-1, 

E-2, or E-3 to service the debt that each owed. According to the Loan 

Memo, their combined liabilities, including the Borrower E loan, totaled 

$33,529,052. Based on the guarantors' combined cash and cash 

equivalents of $1,069,114, the guarantors' cash amounted to only 

approximately 3.2 percent of their total related debt and City Bank loan 

commitments. 


violation of the Borrower E Loan. The supervisory LTV ratio limit for a 

residential construction loan was 85 percent. The Loan Memo stated that 


LTV ratio of 90.5 percent. The LTV ratio was even higher when 

calculated using the value contained in the appraisal, which did not match 

the value in the Loan Memo. The appraisal did not use the terms 

aggregate retail value or discounted value, and instead provided that the 




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"Gross sellout value" was $9,178,000 and the market value "at 

completion" was $8,105,000. Based on the appraisal's market value at 

completion, the LTV ratio was 92.8 percent. 

118. In or about February 2009, Borrower E defaulted on the loan. 

119. Hanson's and Sheehan's acts and omissions with respect to the Borrower E Loan 



Because the real estate market had collapsed and repayment of the Borrower E Loan depended 

upon the sale of the 28 SFRs, Defendants' exercise of due care was especially important, and yet 

Defendants failed to require any hard equity in the project; they failed to consider the guarantors' 

inability to repay their debts; and they disregarded the LTV ratio violation of the supervisory 

limit. Had Hanson and Sheehan followed prudent, safe, and sound lending practices and the 

Loan Policy, the Bank would not have made the Borrower E Loan, and the resulting damages 

would not have occurred. 

Borrower F 

120. On or about September 10, 2007, Hanson approved a construction loan for 

$10,559,200 to Borrower F (the "Borrower F Loan"). On or about September 11, 2007, Sheehan 

approved the Borrower F Loan. 

121. Between September 2007 and October 2009, the Bank disbursed approximately 

$4,894,737 of the Borrower F Loan. 

122. The Loan Memo for the Borrower F Loan stated that the purpose of the loan was 

to fund the construction of 20 SFRs in Buckley, Washington. In addition, the Loan Memo 

provided that Borrower F was "purchasing 20 of the lots" for the 20 SFRs Borrower F planned to 

build. 



the guarantors of the Borrower F Loan ("Guarantors F-1, F-2, F-3, F-4, and F-5"). 




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124. The Loan Memo provided that the security for the Borrower F Loan was to be the 

project's proposed SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower F Loan because 



a. Failed to require Borrower F to contribute any hard equity to the lots or 

hard costs of the project. The Loan Memo and the Loan Officer Analyses 

for the Borrower F Loan showed that the estimated total cost of the lots 

and hard costs was $10,063,490. Defendants approved the Borrower F 

Loan for $10,559,200. Borrower F, therefore, was not required to 

contribute any equity to the lots or hard costs of this project. Including 

soft costs, the Loan Officer Analyses showed that the estimated total cost 

of the project was $10,707,653. Based on this amount, Borrower F's outof-pocket 

expense for the entire project was only $148,453, which was 

only 1.4 percent of the estimated total cost of the project. 

b. Failed to consider or knew of and disregarded Borrower F's inability to 

repay the Borrower F Loan. According to the Loan Memo, Borrower F 

reported a net loss of $370,171 in 2006, liabilities of $6,361,544, a net 

worth of negative $352,074, and cash on hand of only $51,344. The 

borrower's cash amounted to only approximately 0.5 percent of the 

Borrower F Loan. When Defendants approved the Borrower F Loan, the 

Real Estate Bubble had burst about 14 months earlier, and the borrower 

had insufficient liquid assets to repay the Borrower F Loan. 

c. Failed to consider or knew of and disregarded Guarantors F-1, F-2, F-3, F- 

4, and F-5's inability to repay the Borrower F Loan. First, the Loan 

Memo provided that Guarantors F-1 and F-3 had no assets or liabilities 

and, therefore, could not possibly repay the Borrower F Loan. The Loan 



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Memo showed that the remaining guarantors' combined personal 

liabilities totaled $18,148,470. That amount plus the Borrower F Loan 

totaled $28,707,670. Based on the guarantors' combined cash and cash 

equivalents of $1,468,323, the guarantors' cash plus Borrower F's cash 

amounted to only approximately 5.3 percent of the guarantors' total 

related debt, including the Borrower F Loan. Although the guarantors' 

assets were listed at $35,483,323, 86.3 percent or $30,636,300 of that 

amount was tied up in illiquid equity in closely-held companies and real 

estate holdings. When Defendants approved the Borrower F Loan, the 

Real Estate Bubble had burst, and the guarantors had insufficient liquid 

assets to repay the Borrower F Loan. 


violation of the Borrower F Loan. The supervisory LTV ratio limit for a 

one- to four-family residential construction loan was 85 percent. The 

Loan Memo stated that the discounted value of the collateral was 

$11,732,070, which results in an LTV ratio of 90.0 percent. 


limit of 4 to 1. The Loan Memo showed that Borrower F had a net 

worth of negative $352,074 and, therefore, the borrower's debt-to-worth 

ratio was not within the Loan Policy's limit. 

126. In or about February 2009, Borrower F defaulted on the loan. 

127. Hanson's and Sheehan's acts and omissions with respect to the Borrower F Loan 



Because the real estate market had collapsed and repayment of the Borrower F Loan depended 

upon the sale of the 20 SFRs, Defendants' exercise of due care was especially important, and yet 

Defendants failed to require the borrower to contribute any hard equity to the lots or hard costs 




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of the project; they failed to consider the borrower's and guarantors' inability to repay their 

debts; they disregarded the LTV ratio limit violation; and they failed to enforce the Loan 

Policy's limit on the borrower's debt-to-worth ratio. Had Hanson and Sheehan followed 


the Borrower F Loan, and the resulting damages would not have occurred. 

Borrower G (I) 

128. On or about September 28, 2007, Sheehan approved a construction loan for 

$2,608,000 to Borrower G (the "Borrower G (I) Loan"). On or about the same day, Defendants 

caused or allowed the Bank to disburse approximately $688,688 of the Borrower G (I) Loan. On 

or about October 4, 2007, Hanson approved the Borrower G (I) Loan. 

129. Between September 2007 and October 2009, the Bank disbursed all of the 

Borrower G (I) Loan. 

130. The Loan Memo for the Borrower G (I) Loan stated that the purpose of the loan 

was to fund the construction of two triplex buildings that consisted of six single-family units in 

Seattle, Washington. Borrower G was also planning to use the Borrower G (I) Loan to purchase 

the land for the two triplexes. 


of the six single-family units and that the secondary source of repayment was to be the assets and 

income of the guarantors of the Borrower G (I) Loan ("Guarantors G-1, G-2, and G-3"). 

132. The Loan Memo provided that the security for the Borrower G (I) Loan was to be 

the project's six single-family units. 


practices and/or violated the Loan Policy when they approved the Borrower G (I) Loan because 


a. Failed to require Borrower G to contribute any hard equity to the project. 

The Loan Memo and the Loan Officer Analyses for the Borrower G (I) 




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Defendants approved the Borrower G (I) Loan for $2,608,000. Borrower 

G, therefore, was not required to contribute any equity to this project. 

b. Failed to consider or knew of and disregarded Borrower G's inability to 

repay the Borrower G (I) Loan. The Loan Memo provided two different 

cash balances for Borrower G—$27,996 and $66,558. Neither amount 

was nearly enough to support the Borrower G (I) Loan. In addition, the 

Loan Memo showed that Borrower G's net worth was negative 

$5,379,819. When Defendants approved the Borrower G (I) Loan, the 


had insufficient liquid assets to repay the Borrower G (I) Loan. 

c. Failed to consider or knew of and disregarded Guarantors G-1, G-2, and 

G-3's inability to repay the Borrower G (I) Loan. The guarantors' 

combined cash of $293,402 amounted to only 11.3 percent of the 

Borrower G (I) Loan. Although the guarantors' assets were listed at 

$20,895,756, 95.6 percent or $19,985,000 of that amount was tied up in 

illiquid real estate holdings. In addition, the guarantors' liabilities totaled 

$13,592,497. The guarantors' cash balance totaled only 2.2 percent of 

their combined liabilities. When Defendants approved the Borrower G (I) 

Loan, the Real Estate Bubble had burst, and the guarantors had 

insufficient liquid assets to repay the Borrower G (I) Loan. 


violation of the Borrower G (I) Loan. The supervisory LTV ratio limit for 

a one- to four-family residential construction loan was 85 percent. The 



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e. Failed to enforce or require compliance with the Loan Policy's debt-to- 

worth limit of 4 to 1. The Loan Memo showed that Borrower G had a net 

worth of negative $5,379,819. Therefore, Borrower G's debt-to-worth 

ratio failed to comply with the Loan Policy's limit. 

134. In or about March 2009, Borrower G defaulted on the loan. 

135. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (I) 


Sheehan approved this loan, the Real Estate Bubble had burst about 12 months earlier. Because 

the real estate market had collapsed and repayment of the Borrower G (I) Loan depended upon 

the sale of the two triplexes, Defendants' exercise of due care was especially important, and yet 

Defendants failed to require the borrower to contribute any hard equity to the project; they failed 

to consider the borrower's and guarantors' inability to repay their debts; they disregarded the 

LTV ratio limit violation; and they failed to enforce the Loan Policy's limit on the borrower's 

debt-to-worth ratio. Had Hanson and Sheehan followed prudent, safe, and sound lending 

practices and the Loan Policy, the Bank would not have made the Borrower G (I) Loan, and the 

resulting damages would not have occurred. 

Borrower G (II) 

136. On or about January 25, 2008, Hanson and Sheehan approved a construction loan 

for $3,592,000 to Borrower G (the "Borrower G (II) Loan"). 

137. Between January 2008 and November 2009, the Bank disbursed approximately 

$2,540,284 of the Borrower G (II) Loan. 

138. The Loan Memo for the Borrower G (II) Loan stated that the purpose of the loan 

was to fund the construction of one SFR and one five-unit multi-family residence in Seattle, 

Washington. Borrower G was also planning to use the Borrower G (II) Loan to purchase the 

land for the residences. 


of the finished homes and that the secondary source of repayment was to be the assets and 




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income of Guarantors G-2 and G-3. 

140. The Loan Memo provided that the security for the Borrower G (II) Loan was to 

be the project's SFR and five-unit multi-family residence. 


practices and/or violated the Loan Policy when they approved the Borrower G (II) Loan because 



The Loan Memo and the Loan Officer Analyses for the Borrower G (II) 



Defendants approved the Borrower G (II) Loan for $3,592,000. Borrower 



repay the Borrower G (II) Loan, even though the January 9, 2008 Loan 


The Loan Memo showed that City Bank's total loan commitment to 

Borrower G, including the Borrower G (II) Loan, was more than $8.4 

million. Borrower G's cash balance equaled only 1.8 percent of this 

aggregate loan commitment. The Loan Memo also provided that 

Borrower G's net worth was only $684,347. Although the Loan Memo 

listed the value of Borrower G's assets at $7,311,047, 98.0 percent or 


fixed assets. When Defendants approved the Borrower G (II) Loan, the 


had insufficient liquid assets to repay the Borrower G (II) Loan. 

c. Failed to consider or knew of and disregarded Guarantors G-2 and G-3's 

inability to repay the Borrower G (II) Loan, even though the January 9, 




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of net worth. The Loan Memo showed that City Bank's loan 

commitments to Guarantors G-2 and G-3's related entities plus the 

guarantors' personal liabilities totaled $23,035,200. The guarantors' and 

borrower's combined cash amounted to only 1.6 percent of this total 

amount of loan commitments and debt. Although the guarantors' assets 

were listed at $20,312,400, 98.4 percent or $19,985,000 of that amount 

was illiquid real estate holdings. When Defendants approved the 

Borrower G (II) Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower G (II) 

Loan. 


violation of the Borrower G (II) Loan. The Bank's January 9, 2008 Loan 



Loan Policy further provided that the LTV ratio limit for residential 

construction loans was 80 percent, which was the same as the supervisory 

LTV ratio limit for multi-family residential construction loans. Given the 


construction project of $3,521,570, the LTV ratio of the Borrower G (II) 

Loan was 102 percent. This LTV ratio violated the Loan Policy's limit 



limit of 4 to 1. The Loan Memo showed that Borrower G had 

liabilities of $6,626,699 and a net worth of $684,347. Borrower G's debtto-worth 

ratio was 9.7 to 1, which exceeded the Loan Policy's limit. 





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143. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (II) 




Because of these negative indicators and because repayment of the Borrower G (II) Loan 

depended upon the sale of the SFR and multi-family residence, Defendants' exercise of due care 

was especially important, and yet Defendants failed to require the borrower to contribute any 

hard equity to the project; they failed to consider the borrower's and guarantors' inability to 

repay their debts; they disregarded the LTV ratio limit violation; and they failed to enforce the 

Loan Policy's limit on the borrower's debt-to-worth ratio. Had Hanson and Sheehan followed 


the Borrower G (II) Loan, and the resulting damages would not have occurred. 

Borrower G (III) 

144. On or about January 28, 2008, Sheehan approved a construction loan for 

$2,156,000 to Borrower G (the "Borrower G (III) Loan"). On or about January 29, 2008, 

Hanson approved the Borrower G (III) Loan. The Loan Memo for this loan showed that, 

including the Borrower G (III) Loan, City Bank's aggregate loan commitment to the related 

entities of Guarantors G-2 and G-3 totaled more than $11.6 million. 

145. Between January 2008 and December 2009, the Bank disbursed approximately 

$2,080,499 of the Borrower G (III) Loan. 

146. The Loan Memo for the Borrower G (III) Loan stated that the purpose of the loan 

was to fund the construction of two SFRs and one five-unit multi-family residence in Seattle, 

Washington. Borrower G was also planning to use the Borrower G (II) Loan to purchase the 

land for the residences. 


of the finished homes and that the secondary source of repayment was to be the assets and 

income of the guarantors. 




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148. The Loan Memo provided that the security for the Borrower G (III) Loan was to 

be the project's two SFRs and one multi-family residence. 


practices and/or violated the Loan Policy when they approved the Borrower G (III) Loan because 



The Loan Memo and the Loan Officer Analyses for the Borrower G (III) 



Defendants approved the Borrower G (III) Loan for $2,156,000. 

Borrower G, therefore, was not required to contribute any equity to this 

project. 


repay the Borrower G (III) Loan, even though the January 9, 2008 Loan 



Borrower G, including the Borrower G (III) Loan, was more than $10.5 






fixed assets. When Defendants approved the Borrower G (III) Loan, the 


had insufficient liquid assets to repay the Borrower G (III) Loan. 


inability to repay the Borrower G (III) Loan, even though the January 9, 




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commitments to Guarantors G-2 and G-3's related entities plus the 





was illiquid real estate holdings. When Defendants approved the 

Borrower G (III) Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower G (III) 

Loan. 


violation of the Borrower G (III) Loan. The Bank's January 9, 2008 Loan 







construction project of $1,837,299, the LTV ratio of the Borrower G (III) 











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151. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (III) 




Because of these negative indicators and because repayment of the Borrower G (III) Loan 

depended upon the sale of the two SFRs and one multi-family residence, Defendants' exercise of 

due care was especially important, and yet Defendants failed to require the borrower to 

contribute any hard equity to the project; they failed to consider the borrower's and guarantors' 

inability to repay their debts; they disregarded the LTV ratio limit violation; and they failed to 

enforce the Loan Policy's limit on the borrower's debt-to-worth ratio. Had Hanson and Sheehan 


have made the Borrower G (III) Loan, and the resulting damages would not have occurred. 

Borrower G (IV) 

152. On or about March 4, 2008, Sheehan approved a construction loan for $2,280,000 

to Borrower G (the "Borrower G (IV) Loan"). On or about the same day, Defendants caused or 

allowed the Bank to disburse approximately $462,317 of the Borrower G (IV) Loan. On or 

about March 5, 2008, Hanson approved the Borrower G (IV) Loan. The Loan Memo for this 

loan showed that, including the Borrower G (IV) Loan, City Bank's aggregate loan commitment 

to the related entities of Guarantors G-2 and G-3 totaled more than $15.6 million. 

153. Between March 2008 and September 2009, the Bank disbursed approximately 

$1,201,965 of the Borrower G (IV) Loan. 

154. The Loan Memo for the Borrower G (IV) Loan stated that the purpose of the loan 

was to fund the construction of one eight-unit building in Seattle, Washington. Borrower G was 

also planning to use the Borrower G (IV) Loan to purchase the land for the building. 


of the eight single-family units and that the secondary source of repayment was to be the assets 

and income of the guarantors. 




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156. The Loan Memo provided that the security for the Borrower G (IV) Loan was to 

be the project's multi-family residence. 


practices and/or violated the Loan Policy when they approved the Borrower G (IV) Loan because 



The Loan Memo and the Loan Officer Analysis for the Borrower G (IV) 



Defendants approved the Borrower G (IV) Loan for $2,280,000. 


project. 


repay the Borrower G (IV) Loan, even though the January 9, 2008 Loan 



Borrower G, including the Borrower G (IV) Loan, was more than $12.8 






fixed assets. When Defendants approved the Borrower G (IV) Loan, the 

Real Estate Bubble had burst more than 20 months earlier, and the 

borrower had insufficient liquid assets to repay the Borrower G (IV) Loan. 


inability to repay the Borrower G (IV) Loan, even though the January 9, 



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commitments to Guarantors G-2 and G-3' s related entities plus the 





was illiquid equity in closely-held companies and real estate holdings. 

When Defendants approved the Borrower G (IV) Loan, the Real Estate 

Bubble had burst, and the guarantors had insufficient liquid assets to repay 

the Borrower G (IV) Loan. 


violation of the Borrower G (IV) Loan. The Bank's January 9, 2008 Loan 



Loan Policy further provided that the LTV ratio limit for multi-family 

residential construction loans was 80 percent, which was the same as the 

supervisory LTV ratio limit for multi-family residential construction 

loans. Given the loan amount of $2,280,000 and the estimated aggregate 

cost of the construction project of $2,202,037, the LTV ratio of the 

Borrower G (IV) Loan was 103.5 percent. This LTV ratio violated the 

Loan Policy's limit and the supervisory limit. 








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159. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (IV) 




Because of these negative indicators and because repayment of the Borrower G (IV) Loan 

depended upon the sale of the multi-family residence, Defendants' exercise of due care was 

especially important, and yet Defendants failed to require the borrower to contribute any hard 

equity to the project; they failed to consider the borrower's and guarantors' inability to repay 

their debts; they disregarded the LTV ratio limit violation; and they failed to enforce the Loan 



the Borrower G (IV) Loan, and the resulting damages would not have occurred. 

Borrower G (V) 

160. On or about March 28, 2008, Hanson and Sheehan approved a construction loan 

for $3,316,800 to Borrower G (the "Borrower G (V) Loan"). The Loan Memo for this loan 

showed that, including the Borrower G (V) Loan, City Bank's aggregate loan commitment to the 

related entities of Guarantors G-2 and G-3 totaled more than $22.8 million. 


$943,427 of the Borrower G (V) Loan. 

162. The Loan Memo for the Borrower G (V) Loan stated that the purpose of the loan 

was to fund the construction of 10 townhomes consisting of two five-unit buildings in Seattle, 

Washington. Borrower G was also planning to use the Borrower G (V) Loan to purchase the 

land for the two buildings. 


of the 10 single-family units and that the secondary source of repayment was to be the assets and 


164. The Loan Memo provided that the security for the Borrower G (V) Loan was to 




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be the project's townhomes. 


practices and/or violated the Loan Policy when they approved the Borrower G (V) Loan because 



The Loan Memo and the Loan Officer Analyses for the Borrower G (V) 



Defendants approved the Borrower G (V) Loan for $3,316,800. Borrower 



repay the Borrower G (V) Loan, even though the January 9, 2008 Loan 



Borrower G, including the Borrower G (V) Loan, was more than $16.1 

million. The Loan Memo listed two different numbers for Borrower G's 

cash balance. One figure was $58,233.85, and the other figure was 

negative $15,383. The Loan Memo did not explain how negative cash on 

hand was possible. Even if Borrower G had $58,234 of cash on hand, this 

amount equaled only 0.4 percent of City Bank's aggregate loan 

commitment to Borrower G. The Loan Memo also provided that 

Borrower G's net worth was negative $132,461. Although the Loan 

Memo listed the value of Borrower G's assets at $1,801,181, 87.8 percent 

or $1,581,582 of those assets consisted of illiquid "development costs" 

and fixed assets. Moreover, the Loan Memo provided that Borrower G's 

income statement, dated December 31, 2007, showed that Borrower G 

suffered a net loss of $68,162. When Defendants approved the Borrower 



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G (V) Loan, the Real Estate Bubble had burst about 21 months earlier, and 

the borrower had insufficient liquid assets to repay the Borrower G (V) 

Loan. 


inability to repay the Borrower G (V) Loan, even though the January 9, 


of net worth. The Loan Memo showed that, including the Borrower G (V) 

Loan, City Bank's loan commitments to Guarantors G-2 and G-3' s related 

entities plus the guarantors' personal liabilities totaled $27,245,900. The 


of this total amount of loan commitments and debt. Although the 

guarantors' assets were listed at $21,056,785, 98.3 percent or $20,695,000 

of that amount was illiquid equity in various closely-held companies and 

real estate holdings. When Defendants approved the Borrower G (V) 

Loan, the Real Estate Bubble had burst, and the guarantors had 

insufficient liquid assets to repay the Borrower G (V) Loan. 


violation of the Borrower G (V) Loan. The Bank's January 9, 2008 Loan 






loan amount of $3,316,800 and the project's estimated aggregate cost of 

$3,180,265, the LTV ratio of the Borrower G (V) Loan was 104.3 percent. 

This LTV ratio violated the Loan Policy's limit and the supervisory limit. 

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limit of 4 to 1. The Loan Memo showed that Borrower G had a net 

worth of negative $132,461. Therefore, Borrower G's debt-to-worth ratio 

was not in compliance with the Loan Policy. 


167. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (V) 




Because of these negative indicators and because repayment of the Borrower G (V) Loan 

depended upon the sale of the 10 townhomes, Defendants' exercise of due care was especially 


project; they failed to consider the borrower's and guarantors' inability to repay their debts; they 



lending practices and the Loan Policy, the Bank would not have made the Borrower G (V) Loan, 

and the resulting damages would not have occurred. 

Borrower G (VI) 

168. On or about March 28, 2008, Hanson and Sheehan approved a construction loan 

for $5,564,000 to Borrower G (the "Borrower G (VI) Loan"). The Loan Memo for this loan 

showed that, including the Borrower G (VI) Loan, City Bank's aggregate loan commitment to 

the related entities of Guarantors G-2 and G-3 totaled more than $25 million. 

169. Between March 2008 and November 2009, the Bank disbursed approximately 

$2,187,702 of the Borrower G (VI) Loan. 

170. The Loan Memo for the Borrower G (VI) Loan stated that the purpose of the loan 

was to fund the construction of two duplexes and nine "single buildings" for a total of 13 

townhomes in Seattle, Washington. Borrower G was also planning to use the Borrower G (VI) 




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Loan to purchase the land for the townhomes. 


of the finished townhomes and that the secondary source of repayment was to be the assets and 


172. The Loan Memo provided that the security for the Borrower G (VI) Loan was to 

be the project's 13 townhomes. 


practices and/or violated the Loan Policy when they approved the Borrower G (VI) Loan because 




The Loan Memo and the Loan Officer Analyses for the Borrower G (VI) 



Defendants approved the Borrower G (VI) Loan for $5,564,000. 


project. 


repay the Borrower G (VI) Loan, even though the January 9, 2008 Loan 



Borrower G, including the Borrower G (VI) Loan, was more than $18.4 



negative $15,383. The Loan Memo did not explain how negative cash on 

hand was possible. Even if Borrower G had $58,234 of cash on hand, this 

amount equaled only 0.3 percent of City Bank's aggregate loan 




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Borrower G's net worth was negative $132,461. Although the Loan 

Memo listed the value of Borrower G's assets at $1,801,181, 87.8 percent 

or $1,581,582 of those assets consisted of illiquid "development costs" 

and fixed assets. Moreover, the Loan Memo provided that Borrower G's 

income statement, dated December 31, 2007, showed that Borrower G 

suffered a net loss of $68,162. When Defendants approved the Borrower 

G (VI) Loan, the Real Estate Bubble had burst about 21 months earlier, 

and the borrower had insufficient liquid assets to repay the Borrower G 

(VI) Loan. 


inability to repay the Borrower G (VI) Loan, even though the January 9, 


of net worth. The Loan Memo showed that, including the Borrower G 

(VI) Loan, City Bank's loan commitments to Guarantors G-2 and G-3's 

related entities plus the guarantors' personal liabilities totaled 

$29,493,100. The guarantors' and borrower's combined cash amounted to 

only 1.1 percent of this total amount of loan commitments and debt. 




Borrower G (VI) Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower G (VI) 

Loan. 


violation of the Borrower G (VI) Loan. The Bank's January 9, 2008 Loan 






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construction loans was 80 percent, which was less than the supervisory 

LTV ratio limit for one- to four-family residential construction loans of 85 

percent. Given the loan amount of $5,564,000 and the project's estimated 

aggregate cost of $4,804,572, the LTV ratio of the Borrower G (VI) Loan 

was 115.8 percent. This LTV ratio violated the Loan Policy's limit and 

the supervisory limit. 

e. Failed to enforce or require compliance with the Loan Policy's debt-to- 

worth limit of 4 to 1. The Loan Memo showed that Borrower G had a net 

worth of negative $132,461. Therefore, Borrower G's debt-to-worth ratio 

was not in compliance with the Loan Policy. 


175. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (VI) 




Because of these negative indicators and because repayment of the Borrower G (VI) Loan 

depended upon the sale of the 13 townhomes, Defendants' exercise of due care was especially 


project; they failed to consider the borrower's and guarantors' inability to repay their debts; they 



lending practices and the Loan Policy, the Bank would not have made the Borrower G (VI) 

Loan, and the resulting damages would not have occurred. 

Borrower G (VII) 

176. On or about July 17, 2008, Hanson and Sheehan approved a construction loan for 

$592,000 to Borrower G (the "Borrower G (VII) Loan"). The Loan Memo for this loan showed 



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that, including the Borrower G (VII) Loan, City Bank's aggregate loan commitment to the 

related entities of Guarantors G-2 and G-3 totaled more than $29 million. 

177. Between August 2008 and November 2009, the Bank disbursed approximately 

$571,142 of the Borrower G (VII) Loan. 

178. The Loan Memo for the Borrower G (VII) Loan stated that the purpose of the 

loan was to fund the construction of one SFR in Seattle, Washington. 


of the finished home and that the secondary source of repayment was to be the assets and income 

of the guarantors. 

180. The Loan Memo provided that the security for the Borrower G (VII) Loan was to 

be the project's one SFR. 


practices and/or violated the Loan Policy when they approved the Borrower G (VII) Loan 

because they, among other things: 


The Loan Memo and the Loan Officer Analysis for the Borrower G (VII) 


interest and financing-related fees and expenses, was $552,315. 

Defendants approved the Borrower G (VII) Loan for $592,000. Borrower 



repay the Borrower G (VII) Loan, even though the January 9, 2008 Loan 



Borrower G, including the Borrower G (VII) Loan, was more than $22.3 






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$47,326. Even if Borrower G had approximately $342,116 of cash on 

hand, this amount equaled only 1.5 percent of City Bank's aggregate loan 


Borrower G's income statement, dated March 31, 2008, showed that 

Borrower G suffered a net loss of $68,315. Although the Loan Memo 

listed the value of Borrower G's assets at $8,723,306, 97 percent or 

$8,457,943 of those assets consisted of illiquid "development costs" and 

fixed assets. Moreover, Borrower G's liabilities were $8,494,109. When 

Defendants approved the Borrower G (VII) Loan, the Real Estate Bubble 

had burst more than 25 months earlier, and the borrower had insufficient 

liquid assets to repay the Borrower G (VII) Loan. 


inability to repay the Borrower G (VII) Loan, even though the January 9, 


of net worth. The Loan Memo showed that, including the Borrower G 

(VII) Loan, City Bank's loan commitments to Guarantors G-2 and G-3's 

related entities plus the guarantors' personal liabilities totaled 

$33,499,900. The guarantors' and borrower's combined cash amounted to 

only 1.8 percent of this total amount of loan commitments and debt. 




Borrower G (VII) Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower G (VII) 

Loan. 


violation of the Borrower G (VII) Loan. The Bank's January 9, 2008 




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Loan Policy provided that, for purposes of the LTV ratio, "Value shall be 





percent. Given the loan amount of $592,000 and the project's estimated 

aggregate cost of $552,315, the LTV ratio of the Borrower G (VII) Loan 

was 107.2 percent. This LTV ratio violated the Loan Policy's limit and 

the supervisory limit. 



liabilities of $8,494,109 and a net worth of only $229,197. Borrower G's 

debt-to-worth ratio, therefore, was 37 to 1, which exceeded the Loan 

Policy's limit. 

182. In or about May 2009, Borrower G defaulted on the loan. 

183. Hanson's and Sheehan's acts and omissions with respect to the Borrower G (VII) 




Because of these negative indicators and because repayment of the Borrower G (VII) Loan 

depended upon the sale of the SFR, Defendants' exercise of due care was especially important, 

and yet Defendants failed to require the borrower to contribute any hard equity to the project; 

they failed to consider the borrower's and guarantors' inability to repay their debts; they 



lending practices and the Loan Policy, the Bank would not have made the Borrower G (VII) 





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Borrower H 

184. On or about January 24, 2008, Sheehan approved a refinancing and construction 

loan for $5,568,680 to Borrower H (the "Borrower H Loan"). On or about January 25, 2008, 

Hanson approved the Borrower H Loan. The Loan Memo showed that, before the Borrower H 

Loan, City Bank already had an aggregate loan commitment of over $8.8 million to Borrower H 

and an entity related to Borrower H ("Related Entity H"). 

185. Between February 2008 and October 2009, the Bank disbursed approximately 

$3,028,563 of the Borrower H Loan. 

186. The Loan Memo for the Borrower H Loan stated that the purpose of the loan was 

to fund the construction of nine SFRs in Bonney Lake, Washington. The Loan Memo also 

provided that "proceeds from the subject loans will pay in full the underlying development loan 

(note # 915082-003)" ("Note 003"). Related Entity H was the borrower on Note 003, which had 

an outstanding balance of approximately $2,713,407. 




188. The Loan Memo provided that the security for the Borrower H Loan was to be the 

project's nine SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower H Loan because 


a. Failed to require Borrower H to contribute any hard equity to the lots or 

hard costs of the project. The Loan Memo for the Borrower H Loan 

showed that the estimated purchase price of the lots plus the hard costs of 

the project totaled $4,961,952. Defendants approved the Borrower H 

Loan for $5,568,680. Borrower H, therefore, was not required to 

contribute any equity to the lots or hard costs of the project. 




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b. Failed to consider or knew of and disregarded Borrower H's inability to 

repay the Borrower H Loan, even though the January 9, 2008 Loan Policy 

stressed the importance of liquidity in the composition of net worth. The 

Loan Memo's financial information on Borrower H was internally 

inconsistent and confusing. For example, the Loan Memo listed Borrower 

H's "Total Cash On Hand" at $1,000,828. Elsewhere, the Loan Memo 

provided that Borrower H's cash balance was only $16,051. The Loan 

Memo also showed that Borrower H's liabilities were negative 

$1,519,206, explaining that there was a shareholder loan with a balance of 

negative $1,652,228. In any event, the Loan Memo showed that City 

Bank's total loan commitment to Borrower H, excluding the Borrower H 

Loan, was more than $6.1 million. When Defendants approved the 

Borrower H Loan, the Real Estate Bubble had burst about 19 months 


Borrower H Loan. 

c. Failed to consider or knew of and disregarded Guarantors H-1 and H-2's 

inability to repay the Borrower H Loan, even though the January 9, 2008 


worth. The Loan Memo showed that, before the Borrower H Loan, City 

Bank's loan commitments to Guarantors H-1 and H-2's related entities 

plus the guarantors' personal liabilities totaled $8,928,087. The 



guarantors' assets summed up to $9,184,000, 81.1 percent or $7,450,000 

of that amount was illiquid real estate holdings. When Defendants 

approved the Borrower H Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower H Loan. 




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violation of the Borrower H Loan. The Bank's January 9, 2008 Loan 






percent. Given the loan amount of $5,568,680 and the estimated total cost 

of the lots and hard costs of $4,961,952, the LTV ratio of the Borrower H 



190. In or about January 2009, Borrower H defaulted on the loan. 

191. Hanson's and Sheehan's acts and omissions with respect to the Borrower H Loan 




Because of these negative indicators and because repayment of the Borrower H Loan depended 


yet Defendants failed to require the borrower to contribute any hard equity to the lots or hard 

costs of the project; they failed to consider the borrower's and guarantors' inability to repay their 

debts; and they disregarded the LTV ratio limit violation. Had Hanson and Sheehan followed 


the Borrower H Loan, and the resulting damages would not have occurred. 

Borrower I (I) 

192. On or about March 19, 2008, Hanson and Sheehan caused or allowed the Bank to 

disburse $1,793,063 of a construction loan that was made to Borrower I in the amount of 

$4,204,800 (the "Borrower I (I) Loan"). On or about March 24, 2008, Hanson and Sheehan 




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approved the Borrower I (I) Loan. The Loan Memo for this loan showed that City Bank had 

already made loans with an aggregate commitment of over $24,264,538 to Borrower I when 

Defendants approved the Borrower I (I) Loan. 


$2,674,224 of the Borrower I (I) Loan. 

194. The Loan Memo for the Borrower I (I) Loan stated that the purpose of the loan 

was to fund the construction of six four-plex buildings located in Edgewater, Washington. Other 

portions of the Loan Memo and the Disbursement Request and Authorization form, however, 

indicated that a portion of the loan proceeds were to be used to acquire lots on which to build the 

six four-plex buildings. 



the guarantors of the Borrower I (I) Loan ("Guarantors I-1 and I-2"). 

196. The security for the Borrower I (I) Loan was to be the project's six four-plexes. 


practices and/or violated the Loan Policy when they approved the Borrower I (I) Loan because 


a. Failed to require Borrower Ito contribute hard equity to the project. The 

estimated combined lot and hard costs of the project were $4,007,760, 

which was less than the amount of the Borrower I (I) Loan. Borrower I 

did not need to contribute any equity to the lots or hard costs of this 


b. Failed to consider or knew of and disregarded Guarantors I-1 and I-2's 

inability to repay the Borrower I (I) Loan, even though the January 9, 


of net worth. Guarantors I-1 and 1-2 were also principals of Borrower I. 

The Loan Memo for the Borrower I (I) Loan provided that Guarantors I-1 




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and 1-2 had cash and marketable securities on hand of $544,529. The 

Loan Memo also showed that City Bank's total loan commitment to 

Borrower I plus Guarantors I-1 and I-2's personal liabilities totaled more 

than $37.4 million. Borrower I's cash plus the guarantors' cash and 

marketable securities was only 9.4 percent of this amount. Guarantors I-1 

and I-2's combined assets totaled $44,462,364, but 82.2 percent of those 

assets consisted of illiquid real estate and equity in closely-held 

businesses. When Defendants approved the Borrower I (I) Loan, the Real 

Estate Bubble had burst more than 20 months earlier, and the guarantors 

had insufficient liquid assets to repay the Borrower I (I) Loan. 


violation of the Borrower I (I) Loan. The Bank's January 9, 2008 Loan 




residential construction loans was 80 percent. The Loan Memo stated that 


LTV ratio of 91.8 percent. Based on the estimated lot and hard costs of 

$4,007,760, the LTV ratio was 104.9 percent. 


limit of 4 to 1. The Loan Memo showed that Borrower I had 

business liabilities of $88,657,281 and a net worth of $11,600,388 

resulting in a debt-to-worth ratio of 7.6 to 1. 

198. In or about March 2009, Borrower I defaulted on the loan. 

199. Hanson's and Sheehan's acts and omissions with respect to the Borrower I (I) 






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Because of these negative indicators and because repayment of the Borrower I (I) Loan depended 

upon the sale of the six four-plex buildings making up the loan collateral, Defendants' exercise 

of due care was especially important, and yet Defendants failed to require Borrower I to 

contribute a meaningful amount of hard equity to the project; they failed to consider the 

guarantors' lack of liquidity; they disregarded the LTV violation for the Borrower I (I) Loan; and 

they did not enforce the Loan Policy's debt-to-worth ratio limit. Had Hanson and Sheehan 


have made the Borrower I (I) Loan, and the resulting damages would not have occurred. 

Borrower I (II) 

200. On or about April 16, 2008, Hanson and Sheehan approved a construction loan 

for $5,512,000 to Borrower I (the "Borrower I (II) Loan"). The Loan Memo for this loan 

showed that City Bank had already made loans with an aggregate commitment of over 

$27,394,978.17 to Borrower I when Defendants approved the Borrower I (II) Loan. 

201. Between April 2008 and October 2009, the Bank disbursed approximately 

$2,834,514 of the Borrower I (II) Loan. 

202. The Loan Memo for the Borrower I (II) Loan stated that the purpose of the loan 

was to fund the construction of eight four-plex buildings in Puyallup, Washington. Other 

portions of the Loan Memo and Disbursement Request and Authorization form, however, 

indicated that a portion of the loan proceeds were used to acquire lots on which to build the eight 

four-plex buildings. 




204. The Loan Memo provided that the security for the Borrower I (II) Loan was to be 

the project's eight four-plex buildings. 





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practices and/or violated the Loan Policy when they approved the Borrower I (II) Loan because 


a. Failed to require Borrower Ito contribute hard equity to the project. The 


which was less than the amount of the Borrower I (II) Loan. Borrower I 




inability to repay the Borrower I (II) Loan, even though the January 9, 


of net worth. The Loan Memo for the Borrower I (II) Loan provided that 

Guarantors I-1 and 1-2 had cash and marketable securities on hand of 

$444,616. The Loan Memo also showed that City Bank's total loan 

commitment to Borrower I plus Guarantors I-1 and I-2's personal 

liabilities totaled more than $45 million. Borrower I's cash plus 

Guarantors I-1 and I-2's cash and marketable securities was only 7.5 

percent of this amount. The aggregate value of Guarantors I-1 and I-2's 

assets was $56,159,511 but 70.8 percent of those assets consisted of 

illiquid real estate and equity in closely-held businesses. When 

Defendants approved the Borrower I (II) Loan, the Real Estate Bubble had 

burst more than 21 months earlier, and the guarantors had insufficient 

liquid assets to repay the Borrower I (II) Loan. 


violation of the Borrower I (II) Loan. The Bank's January 9, 2008 Loan 







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residential construction loans was 80 percent. The Loan Memo stated that 


LTV ratio of 91.5 percent. Based on the estimated lot and hard costs of 

$5,283,928, the LTV ratio was 104.3 percent. 



business liabilities of $88,657,281 and a net worth of $11,600,388 

resulting in a debt-to-worth ratio of 7.6 to 1. 

206. In or about March 2009, Borrower I defaulted on the loan. 

207. Hanson's and Sheehan's acts and omissions with respect to the Borrower I (II) 




Because of these negative indicators and because repayment of the Borrower I (II) Loan 

depended upon the sale of the eight four-plex buildings making up the loan collateral, 

Defendants' exercise of due care was especially important, and yet Defendants failed to require 

Borrower Ito contribute a meaningful amount of hard equity to the project; they failed to 

consider the guarantors' lack of liquidity; they disregarded the LTV violation for the Borrower I 

(II) Loan; and they did not enforce the Loan Policy's debt-to-worth ratio limit. Had Hanson and 

Sheehan followed prudent, safe, and sound lending practices and the Loan Policy, the Bank 

would not have made the Borrower I (II) Loan, and the resulting damages would not have 

occurred. 

Borrower I (III) 

208. On or about October 17, 2008, Hanson and Sheehan approved a construction loan 

for $1,090,400 to Borrower I (the "Borrower I (III) Loan"). The Loan Memo for this loan 


$28,744,058.17 to Borrower I when Defendants approved the Borrower I (III) Loan. 




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209. Between October 2008 and October 2009, the Bank disbursed approximately 

$455,108.60 of the Borrower I (III) Loan. 

210. The Loan Memo for the Borrower I (III) Loan stated that the purpose of the loan 

was to fund the construction of four single-family residences in Auburn, Washington. Other 

portions of the Loan Memo and Disbursement Request and Authorization form, however, 

indicated that a portion of the loan proceeds were used to acquire lots on which to build the four 

residences. Other purposes of the Borrower I (III) Loan were to take out a loan between 

Borrower I and RBC, bring current past due interest payments from Borrower I to the Bank, and 

provide interest carry for other loans from the Bank to Borrower I. According to the Loan 

Memo, RBC "had pulled the plug months ago on new construction loans." 




212. The Loan Memo provided that the security for the Borrower I (III) Loan was to be 

the project's four single-family residential lots. 


practices and/or violated the Loan Policy when they approved the Borrower I (III) Loan because 


a. Knew that Borrower I, as stated in the Loan Memo, had "already run out 

of funds for interest carry on all" of Borrower I's ADC loans from City 

Bank and that Borrower I was going to use the loan proceeds to pay off an 

ADC loan from RBC. At the nadir of the financial crisis in the fall of 

2008, Defendants approved this loan to pay off Borrower I's debt to a 

competitor that, in the words of the Loan Memo, had "pulled the plug 

months ago on new construction loans." Instead of pulling the plug on 

City Bank's ADC lending, Defendants increased City Bank's exposure to 

Borrower I, which was facing a severe liquidity crisis and, according to 




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the Loan Memo, was going to "run out of overhead funds to run the 

company by December 2008." Defendants' plan was for Borrower Ito 

use the equity in the lots that were securing the RBC loan to fund the 

"build-out" of all Borrower I's City Bank-funded plats. In other words, 

Defendants loaned more money to Borrower I so that it could build its 

way to solvency even though the real estate market had collapsed. 

b. Failed to require Borrower Ito contribute hard equity to the project. The 


which was less than the amount of the Borrower I (III) Loan. Borrower I 



c. Failed to consider or knew of and disregarded Guarantors I-1 and I-2's 

inability to repay the Borrower I (III) Loan, even though the October 9, 


of net worth. The Loan Memo for the Borrower I (III) Loan provided that 


$1,599,441. The Loan Memo also showed that City Bank's total loan 

commitment to Borrower I plus Guarantors I-1 and I-2's personal 



percent of this amount. The aggregate value of the guarantors' assets was 

$26,375,097, but the guarantors' combined equity in Borrower I was 

negative $5,672,176. Even though Guarantors I-1 and 1-2 had negative 

equity in Borrower I, the Loan Memo showed that the guarantors' 

combined notes receivable totaled $7,817,314. This large notes receivable 

balance was not explained or analyzed in the Loan Memo, even though it 

was clear that Borrower I was in financial distress. When Defendants 




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approved the Borrower I (III) Loan, the Real Estate Bubble had burst more 

than 27 months earlier, and the guarantors had insufficient liquid assets to 

repay the Borrower I (III) Loan. 


violation of the Borrower I (III) Loan. The Loan Policy provided that the 

LTV ratio limit for single-family residential construction loans was 80 

percent. The Loan Memo contained information indicating that the 

discounted value of the collateral was $1,220,571, which results in an 

LTV ratio of 156.4 percent. 



business liabilities of $80,872,253 and a net worth of $9,568,943 resulting 


f. Failed to obtain or require a timely written appraisal before they approved 

this loan. The Loan Memo stated, "Valuation . . . completed by James 

Vchulek of Greenlake Appraisal in narrative form." However, the loan 

file contains only an appraisal for 69 lots in the project plan dated May 

2008. In light of the quickly deteriorating market conditions, a May 2008 

appraisal was stale by October 2008. Furthermore, the appraisal was for 

69 lots, not the four homes applicable to the Borrower I (III) Loan project. 

214. In or about July 2009, Borrower I defaulted on the loan. 

215. Hanson's and Sheehan's acts and omissions with respect to the Borrower I (III) 




In addition, about 45 days before Hanson and Sheehan approved the Borrower I (III) Loan, 

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individuals and businesses continued to fail. Then, about two weeks before Hanson and Sheehan 

approved the Borrower I (III) Loan, Hanson wrote another memorandum to the Board in which 

he opined that, given the state of the economy, any loan could be considered on a watch list, 

substandard, impaired or a loss. Because Hanson and Sheehan were aware of the dire state of the 

economy and the impacts that the economic downturn had already had on City Bank's business 

and because repayment of the Borrower I (III) Loan depended upon the sale of the four singlefamily 

homes making up the loan collateral, Defendants' exercise of due care was especially 

important, and yet Defendants failed to require Borrower I to contribute a meaningful amount of 

hard equity to the project; they failed to consider the guarantors' lack of liquidity; they 

disregarded the LTV violation for the Borrower I (III) Loan; they did not enforce the Loan 

Policy's debt-to-worth ratio limit; and they failed to require a timely written appraisal. Had 

Hanson and Sheehan followed prudent, safe, and sound lending practices and the Loan Policy, 

the Bank would not have made the Borrower I (III) Loan, and the resulting damages would not 

have occurred. 

Borrower I (IV) 

216. On or about October 17, 2008, Hanson and Sheehan approved a construction loan 

for $3,120,000 to Borrower I (the "Borrower I (IV) Loan"). The Loan Memo for this loan 


$28,744,058.17 to Borrower I when Defendants approved the Borrower I (IV) Loan. 

217. Between October 2008 and November 2009, the Bank disbursed approximately 

$3,033,192.55 of the Borrower I (IV) Loan. 

218. The Loan Memo for the Borrower I (IV) Loan stated that the purpose of the loan 

was to acquire 30 lots in Auburn, Washington. Other purposes of the Borrower I (IV) Loan were 

to take out a loan between Borrower I and RBC, bring current past due interest payments from 

Borrower Ito the Bank, and provide interest carry for other loans from the Bank to Borrower I. 

According to the Loan Memo, RBC "had pulled the plug months ago on new construction 

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220. The Loan Memo provided that the security for the Borrower I (IV) Loan was to 

be the project's 30 lots. 


practices and/or violated the Loan Policy when they approved the Borrower I (IV) Loan because 


a. Knew that Borrower I, as stated in the Loan Memo, had "already run out 

of funds for interest carry on all" of Borrower I's ADC loans from City 

Bank and that Borrower I was going to use the loan proceeds to pay off an 

ADC loan from RBC. At the nadir of the financial crisis in the fall of 

2008, Defendants approved this loan to pay off Borrower I's debt to a 

competitor that, in the words of the Loan Memo, had "pulled the plug 

months ago on new construction loans." Instead of pulling the plug on 

City Bank's ADC lending, Defendants increased City Bank's exposure to 

Borrower I, which was facing a severe liquidity crisis and, according to 

the Loan Memo, was going to "run out of overhead funds to run the 

company by December 2008." Defendants' plan was for Borrower Ito 

use the equity in the lots that were securing the RBC loan to fund the 

"build-out" of all Borrower I's City Bank-funded plats. In other words, 

Defendants loaned more money to Borrower I so that it could build its 

way to solvency even though the real estate market had collapsed. 


inability to repay the Borrower I (IV) Loan, even though the October 9, 


of net worth. The Loan Memo for the Borrower I (IV) Loan provided that 




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$1,599,441. The Loan Memo also showed that City Bank's total loan 

commitment to Borrower 1 plus Guarantors I-1 and I-2's personal 



percent of this amount. The aggregate value of the guarantors' assets was 

$26,375,097, but the guarantors' combined equity in Borrower I was 

negative $5,672,176. Even though Guarantors I-1 and 1-2 had negative 

equity in Borrower I, the Loan Memo showed that the guarantors' 

combined notes receivable totaled $7,817,314. This large notes receivable 

balance was not explained or analyzed in the Loan Memo, even though it 

was clear that Borrower I was in financial distress. When Defendants 

approved the Borrower I (IV) Loan, the Real Estate Bubble had burst 

more than 27 months earlier, and the guarantors had insufficient liquid 

assets to repay the Borrower I (IV) Loan. 


violation of the Borrower I (IV) Loan. The Loan Policy provided that the 

LTV ratio limit for loans to acquire developed lots was 75 percent. The 

Loan Memo contained information indicating that the discounted value of 

the collateral was $3,358,696, which results in an LTV ratio of 92.9 

percent. 



business liabilities of $80,872,253 and a net worth of $9,568,943 resulting 


e. Failed to obtain or require a timely written appraisal before they approved 

this loan. The Loan Memo stated, "Valuation . . . completed by James 




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Vchulek of Greenlake Appraisal in narrative form." However, the loan 

file contains only an appraisal for 69 lots in the project plan dated May 

2008. In light of the quickly deteriorating market conditions, a May 2008 

appraisal was stale by October 2008. Furthermore, the appraisal was for 

69 lots, not the 30 lots applicable to the Borrower I (IV) Loan project. 

222. In or about July 2009, Borrower I defaulted on the loan. 

223. Hanson's and Sheehan's acts and omissions with respect to the Borrower I (IV) 




In addition, about 45 days before Hanson and Sheehan approved the Borrower I (IV) Loan, 

Hanson wrote to the Board that he expected "survival" to be everyone's primary concern as 

individuals and businesses continued to fail. Then, about two weeks before Hanson and Sheehan 

approved the Borrower I (IV) Loan, Hanson wrote another memorandum to the Board in which 

he opined that, given the state of the economy, any loan could be considered on a watch list, 

substandard, impaired or a loss. Because Hanson and Sheehan were aware of the dire state of the 

economy and the impacts that the economic downturn had already had on City Bank's business 

and because repayment of the Borrower I (IV) Loan depended upon the sale of the 30 lots 

making up the loan collateral, Defendants' exercise of due care was especially important, and yet 

Defendants failed to consider the guarantors' lack of liquidity; they disregarded the LTV 

violation for the Borrower I (IV) Loan; they did not enforce the Loan Policy's debt-to-worth 

ratio limit; and they failed to require a timely written appraisal. Had Hanson and Sheehan 


have made the Borrower I (IV) Loan, and the resulting damages would not have occurred. 

Borrower J 

224. On or about March 21, 2008, Hanson and Sheehan caused or allowed the Bank to 

disburse $11,129,039 of a refinancing loan that was made to Borrower J in the amount of 




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$12,412,000 (the "Borrower J Loan"). On or about March 24, 2008, Hanson and Sheehan 

approved the Borrower J Loan. The Loan Memo for this loan showed that City Bank had 

already made loans with an aggregate commitment of over $27.5 million to Borrower J when 

Defendants approved the Borrower J Loan. 

225. Between March 2008 and February 2009, the Bank disbursed approximately 

$12,350,775 of the Borrower J Loan. 

226. The Loan Memo for the Borrower J Loan stated that the purpose of the loan was 

to fund the acquisition of the plat called Overlook at Somerset Hill in Tumwater, Washington. In 

reality, though, the Borrower J Loan was not an acquisition loan. The Loan Memo provided that 

$10,960,100 of the loan's proceeds would be applied to pay down City Bank note 1149-912170- 

250 to Borrower J ("Note 250"). Borrower J had obtained Note 250 to fund the development of 

Overlook. On or about January 2, 2008, less than three months prior to Defendants' approval of 

the Borrower J Loan, City Bank extended the maturity date of Note 250 for three months until 

April 2, 2008. The Loan Memo showed that Note 250 was fully disbursed and had an 

outstanding balance of $11,868,750. The true purpose of the Borrower J Loan, therefore, was to 

refinance a development loan. 

227. The Loan Memo provided that the primary sources of repayment were to be the 

sale of the collateral and refinancing through City Bank loans. The secondary source of 

repayment was to be the assets and income of the guarantor of the Borrower J Loan ("Guarantor 

J"). 

228. The Loan Memo provided that the security for the Borrower J Loan was to be the 

project's platted lots. 


practices and/or violated the Loan Policy when they approved the Borrower J Loan because they, 

among other things: 

a. Failed to consider or knew of and disregarded Borrower J's inability to 

repay the Borrower J Loan, even though the January 9, 2008 Loan Policy 




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Loan Memo for the Borrower J Loan showed that City Bank's total loan 

commitment to Borrower J was already more than $27.5 million. 

Borrower J's cash balance equaled only 6.5 percent of this aggregate loan 

commitment. The Loan Memo also provided that Borrower J's net worth 

was only $607,442. Although the Loan Memo listed the value of 

Borrower J's assets at $29,841,088, 94.0 percent or $29,233,646 of those 

assets consisted of illiquid real estate inventory and fixed assets. In 

addition, the Loan Memo showed that Borrower J had already reached its 

credit limit of $11,868,750 on Note 250. Although the Loan Memo noted 

that $10,960,100 of this amount would be paid off with proceeds from the 

Borrower J Loan, the Loan Memo did not explain why this take-out 

financing was necessary. When Defendants approved the Borrower J 

Loan, the Real Estate Bubble had burst more than 20 months earlier, and 

the borrower had insufficient liquid assets to repay the Borrower J Loan. 

b. Failed to consider or knew of and disregarded Guarantor J's inability to 

repay the Borrower J Loan, even though the January 9, 2008 Loan Policy 


Loan Memo showed that City Bank's loan commitments to Borrower J 

plus the guarantor's personal liabilities totaled $30,247,863. The 

guarantor's and borrower's combined cash amounted to only 9.8 percent 


guarantor's assets totaled $8,557,505, 86.3 percent or $7,388,293 of that 

amount was illiquid equity in various closely-held companies, real estate 

holdings, and a shareholder loan. When Defendants approved the 

Borrower J Loan, the Real Estate Bubble had burst, and the guarantor had 

insufficient liquid assets to repay the Borrower J Loan. 




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violation of the Borrower J Loan. Applicable regulations provided that the 

supervisory LTV ratio for a development loan or a loan for finished lots 

was 75 percent. The Loan Policy also provided that the maximum LTV 

ratio for land development loans was 75 percent. The Loan Memo stated 

that the LTV ratio of the Borrower J Loan was 80 percent, based on an 

appraised aggregate retail value of $15,515,000. This LTV ratio exceeded 

the Loan Policy's limit and the supervisory limit. The LTV ratio based on 

discounted value was even worse. The appraisal provided a discounted 

value of $13,061,000, which results in an LTV ratio of 95 percent. 


limit of 4 to 1. The Loan Memo showed that Borrower J had 

liabilities of $29,233,646 and a net worth of $607,442. Borrower J's debtto-worth 


230. In or about March 2009, Borrower J defaulted on the loan. 

231. Hanson's and Sheehan's acts and omissions with respect to the Borrower J Loan 




Because of these negative indicators and because repayment of the Borrower J Loan depended 

upon the sale of the lots in Overlook, Defendants' exercise of due care was especially important, 

and yet Defendants failed to consider the borrower's and guarantor's inability to repay the 

Borrower J Loan; they disregarded the LTV ratio violation; and they failed to enforce the Loan 

Policy's debt-to-worth ratio limit. Had Hanson and Sheehan followed prudent, safe, and sound 

lending practices and the Loan Policy, the Bank would not have made the Borrower J Loan, and 

the resulting damages would not have occurred. 

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Borrower K 

232. On or about June 19, 2008, Sheehan approved a construction loan for $4,452,000 

to Borrower K (the "Borrower K Loan"). The Loan Memo for this loan showed that City Bank 

had already made loans with an aggregate commitment of over $12 million to Borrower K when 

Sheehan approved the Borrower K Loan. 

233. Between June 2008 and May 2009, the Bank disbursed approximately $2,834,595 

of the Borrower K Loan. 

234. The purpose of the Borrower K loan was to fund the construction of 15 single 

family condominium units, including nine detached units and three duplexes in Lynnwood, 

Washington. 



the guarantors of the Borrower K Loan ("Guarantors K-1 and K-2"). 

236. The Loan Memo provided that the security for the Borrower K Loan was to be the 

project's 15 condominium units. 

237. Sheehan engaged in imprudent, unsafe, and unsound lending practices and/or 

violated the Loan Policy when he approved the Borrower K Loan because he, among other 

things: 

a. Failed to consider or knew of and disregarded Borrower K's inability to 

repay the Borrower K Loan, even though the January 9, 2008 Loan Policy 


Loan Memo showed that City Bank's total loan commitment to Borrower 

K, including the Borrower K Loan, was more than $16,500,000. Borrower 

K's cash balance equaled only 2.7 percent of this aggregate loan 

commitment. The Loan Memo also provided that Borrower K's net worth 

was only $837,103. Although the Loan Memo listed the value of 

Borrower K's assets at $12,399,230, 95.9 percent or $11,892,354 of that 




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amount was illiquid real estate holdings. When Defendants approved the 

Borrower K Loan, the Real Estate Bubble had burst about 23 months 


Borrower K Loan. 

b. Failed to consider or knew of and disregarded Guarantors K-1 and K-2's 

inability to repay the Borrower K loan, even though the January 9, 2008 


worth. The Loan Memo showed that City Bank's loan commitments to 

Borrower K plus the liabilities associated with other entities related to the 

guarantors totaled $17,620,200. The guarantors' and borrower's 

combined cash amounted to only 2.7 percent of this total amount of loan 

commitments and debt. Although the guarantors' assets were listed at 

$2,466,000, 93.7 percent or $2,310,000 of that amount was illiquid real 

estate holding. Of the remaining $156,000, only $21,000 was cash and the 

rest was retirement accounts and personal property. When Defendants 

approved the Borrower K Loan, the Real Estate Bubble had burst, and the 

guarantors had insufficient liquid assets to repay the Borrower K Loan. 


violation of the Borrower K Loan. The supervisory LTV ratio limit for a 

one- to four-family residential construction loan was 85 percent. The 




limit of 4 to 1. The Loan Memo showed that Borrower K had 

business liabilities of $11,562,127 and a net worth of $837,103, resulting 


238. In or about December 2008, Borrower K defaulted on the loan. 




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239. Sheehan's acts and omissions with respect to the Borrower K Loan caused City 

Bank to incur damages in an amount to be proved at trial. When Sheehan approved this loan, the 

Bank had initiated foreclosure proceedings against at least three construction loan borrowers, and 

the Real Estate Bubble had burst more than two years earlier. Because of these negative 

indicators and because repayment of the Borrower K Loan depended upon the sale of the 15 

condominium units, Sheehan's exercise of due care was especially important, and yet he failed to 

consider the borrower's and guarantor's inability to repay their debts; he disregarded the LTV 

ratio violation of the supervisory limit; and he failed to enforce the Loan Policy's limit on the 

borrower's debt-to-worth ratio. Had Sheehan followed prudent, safe, and sound lending 

practices and the Loan Policy, the Bank would not have made the Borrower K Loan, and the 

resulting damages would not have occurred. 

Borrower L 

240. On or about June 27, 2008, Hanson and Sheehan approved a refinancing and 

construction loan for $6,220,000 to Borrower L (the "Borrower L Loan"). The Loan Memo for 

this loan showed that City Bank had already made loans with an aggregate commitment of over 

$8.3 million to Borrower L when Defendants approved the Borrower L Loan. 

241. Between July 2008 and November 2009, the Bank disbursed approximately 

$4,025,308 of the Borrower L Loan. 

242. The Loan Memo for the Borrower L Loan stated that the purpose of the loan was 

to fund the construction of nine SFRs in Kirkland, Washington. In addition, the Loan Memo 

provided that the Borrower L Loan would "retire the development loan booked under note 

#1149-915595-003." Upon the closing of the Borrower L Loan, $2,150,118 was applied to pay 

off note #1149-915595-003. 



the guarantor of the Borrower L Loan ("Guarantor L"). 

244. The Loan Memo provided that the security for the Borrower L Loan was to be the 




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project's nine SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower L Loan because 


a. Failed to require Borrower L to contribute any hard equity to the project. 



Defendants approved the Borrower L Loan for $6,220,000. Borrower L, 

therefore, was not required to contribute any hard equity to this project. 

b. Failed to consider or knew of and disregarded Borrower L's inability to 

repay the Borrower H Loan, even though the January 9, 2008 Loan Policy 


Loan Memo provided that Borrower L's cash balance was only $11,435. 

The Loan Memo also showed that City Bank's total loan commitment to 

Borrower L, excluding the Borrower L Loan, was more than $8.3 million. 

Borrower L's cash balance was only 0.1 percent of City Bank's total loan 

commitment prior to making the Borrower L Loan. When Defendants 

approved the Borrower L Loan, the Real Estate Bubble had burst about 24 

months earlier, and the borrower had insufficient liquid assets to repay the 

Borrower L Loan. 

c. Failed to consider or knew of and disregarded Guarantor L's inability to 

repay the Borrower L Loan, even though the January 9, 2008 Loan Policy 


Loan Memo showed that City Bank's loan commitments to Guarantor L's 

related entities plus the guarantor's personal liabilities totaled $8,640,500. 

The guarantor's and borrower's combined cash amounted to only 2.4 

percent of this total amount of loan commitments and debt. Although the 




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guarantors' assets totaled to $3,237,138, 93.3 percent or $3,021,394 of that 

amount was illiquid equity in closely-held companies and real estate 

holdings. When Defendants approved the Borrower L Loan, the Real 

Estate Bubble had burst, and the guarantors had insufficient liquid assets 

to repay the Borrower L Loan. 


violation of the Borrower L Loan. The Bank's January 9, 2008 Loan 







of the project of $5,726,304, the LTV ratio of the Borrower H Loan was 

108.6 percent. This LTV ratio violated the Loan Policy's limit and the 

supervisory limit. 

246. In or about August 2009, Borrower L defaulted on the loan. 

247. Hanson's and Sheehan's acts and omissions with respect to the Borrower L Loan 




Because of these negative indicators and because repayment of the Borrower L Loan depended 


yet Defendants failed to require the borrower to contribute any hard equity to the project; they 

failed to consider the borrower's and guarantors' inability to repay their debts; and they 

disregarded the LTV ratio limit violation. Had Hanson and Sheehan followed prudent, safe, and 

sound lending practices and the Loan Policy, the Bank would not have made the Borrower L 




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Borrower M 

248. On or about August 6, 2008, Hanson and Sheehan approved a construction loan 

for $6,840,000 to Borrower M (the "Borrower M Loan"). The Loan Memo for this loan showed 

that, including the Borrower M Loan, City Bank's aggregate loan commitment to Borrower M 

and the related entities of the guarantors of the Borrower M Loan ("Guarantors M-1 and M-2") 

totaled more than $25.7 million. The Loan Memo listed four different loans to a related entity 

("Related Entity M") with a total commitment of over $6.1 million. On or about June 10, 2008, 

which was less than two months before Defendants approved the Borrower M Loan, City Bank 

extended the maturities of all four of Related Entity M's loans. The Loan Memo, however, 

failed to disclose the reasons behind these very recent extensions. 

249. Between August 2008 and December 2009, the Bank disbursed approximately 

$5,673,222 of the Borrower M Loan. 

250. The Loan Memo for the Borrower M Loan stated that the purpose of the loan was 

to fund the construction of 22 SFRs in Seattle, Washington. Borrower M was also planning to 

use a portion of the Borrower M Loan proceeds to purchase the land for the 22 SFRs. 


of the 22 single-family units and that the secondary source of repayment was to be the assets and 


252. The Loan Memo provided that the security for the Borrower M Loan was to be 

the project's 22 SFRs. 


practices and/or violated the Loan Policy when they approved the Borrower M Loan because 


a. Failed to require Borrower M to contribute any hard equity to the lots or 

hard costs of the project. The Loan Memo for the Borrower M Loan 

showed that the estimated purchase price of the lots plus the hard costs of 




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the project totaled $6,019,046. Defendants approved the Borrower M 

Loan for $6,840,000. Borrower M, therefore, was not required to 

contribute any equity to the lots or hard costs of the project. 

b. Failed to consider or knew of and disregarded Borrower M's inability to 

repay the Borrower M Loan, even though the January 9, 2008 Loan Policy 

stressed the importance of liquidity in the composition of net worth. 

According to the Loan Memo, Borrower M reported liabilities of 

$44,369,772. Although Borrower M's assets were listed at $49,746,816, 

95.9 percent or $47,711,714 of that amount was in held in illiquid real 

estate holdings and other property and equipment. In addition, Borrower 

M's debt-to-worth ratio was 8.3 to 1, which exceeded the Loan Policy's 

limit of 4 to 1. When Defendants approved the Borrower M Loan, the 

Real Estate Bubble had burst more than 25 months earlier, and the 

borrower had insufficient liquid assets to repay the Borrower M Loan. 

c. Failed to consider or knew of and disregarded Guarantors M-1 and M-2's 

inability to repay the Borrower M Loan, even though the January 9, 2008 


worth. The Loan Memo showed that the City Bank's loan commitments 

to the related entities of Guarantors M-1 and M-2, including the Borrower 

M Loan, totaled $25,772,800. The guarantors' personal liabilities were an 

additional $2,138,985. All of this debt was supported by the guarantors' 

mere $66,138 of cash on hand. This cash balance plus Borrower M's cash 

equaled only 6 percent of the total commitments to Guarantors M-1 and 

M-2's related entities plus their personal liabilities. Although the 

guarantors' assets were listed at $11,506,405, 94.9 percent or $10,925,007 

of that amount was tied up in illiquid equity in closely-held companies and 

real estate holdings. When Defendants approved the Borrower M Loan, 




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the Real Estate Bubble had burst, and the guarantors had insufficient 

liquid assets to repay the Borrower M Loan. 


violation of the Borrower M Loan. The Bank's January 9, 2008 Loan 







of the lots and hard costs of $6,019,046, the LTV ratio of the Borrower M 



254. In or about July 2009, Borrower M defaulted on the loan. 

255. Hanson's and Sheehan's acts and omissions with respect to the Borrower M Loan 




Because of these negative indicators and because repayment of the Borrower M Loan depended 

upon the sale of the SFRs, Defendants' exercise of due care was especially important, and yet 

Defendants failed to require the borrower to contribute any hard equity to the lots or hard costs 

of the project; they failed to consider the borrower's and guarantors' inability to repay their 

debts; they disregarded the LTV ratio limit violation; and they failed to enforce the Loan 



the Borrower M Loan, and the resulting damages would not have occurred. 

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Borrower N 

256. On or about July 31, 2008, Sheehan approved a construction loan for $7,860,000 

to Borrower N (the "Borrower N Loan"). On or about August 1, 2008, Hanson approved the 

Borrower N Loan. The Loan Memo for this loan showed that, including the Borrower N Loan, 

City Bank's aggregate loan commitment to Borrower N totaled over $15.3 million. 

257. Between August 2008 and October 2009, the Bank disbursed approximately 

$3,003,242 of the Borrower N Loan. 

258. The Loan Memo for the Borrower N Loan stated that the purpose of the loan was 

to refinance the construction of three four-unit townhome buildings in Seattle. 



the guarantor. 

260. The Loan Memo provided that the security for the Borrower N Loan was to be the 

project's 12 townhome units. 


practices and/or violated the Loan Policy when they approved the Borrower N Loan because 


a. Failed to require Borrower N to contribute hard equity to the project. The 


which was $652,845 less than the amount of the Borrower N Loan. 

Borrower N did not need to contribute any equity to the lots or hard costs 

of this construction project. 

b. Failed to consider or knew of and disregarded Borrower N's inability to 

repay the Borrower N Loan, even though the January 9, 2008 Loan Policy 


Loan Memo showed that City Bank's total loan commitment to Borrower 

N, including the Borrower N Loan, was more than $15.3 million. 




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Borrower N's cash balance equaled only 0.4 percent of this aggregate 

loan commitment. The Loan Memo also provided that Borrower N's net 

worth was only $2,634,903. Although the Loan Memo listed the value of 

Borrower N's assets at $20,805,573, 99.3 percent or $20,661,330 of those 

assets consisted of illiquid real estate inventory and fixed assets. When 

Defendants approved the Borrower N Loan, the Real Estate Bubble had 

burst more than 24 months earlier, and the borrower had insufficient liquid 

assets to repay the Borrower N Loan. 

c. Failed to perform or insist upon an analysis of the guarantors' ability to 

repay the Borrower N Loan, even though the January 9, 2008 Loan Policy 

stressed the importance of liquidity in the composition of net worth. 

When Defendants approved the Borrower N Loan, Borrower N's loan 

commitments to City Bank plus the guarantors' personal liabilities totaled 

$22,874,539. The borrower and guarantors had $502,036 in cash on hand, 

but the guarantors' and borrower's combined cash amounted to only 2.2 

percent of the guarantors' personal liabilities plus Borrower N's City Bank 

loan commitments. No analysis was performed on the guarantors' ability 

to repay all of their personal liabilities and cover Borrower N's loan 

commitments even though the national real estate market had collapsed 

when Defendants approved the Borrower N Loan. 


violation of the Borrower N Loan. The Bank's January 9, 2008 Loan 




construction loans was 80 percent. The supervisory LTV ratio limit for a 

residential construction loan was 85 percent. The Loan Memo for the 




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Borrower N Loan listed the average lot price as $892,385 and the average 

hard costs per townhome as $1,510,000. For all three townhomes, the 

estimated combined lot and hard costs were $7,207,155. Thus, the LTV 

ratio of the Borrower N Loan was 109 percent based on the project's 

estimated combined lot and hard costs. 


limit of 4 to 1. The Loan Memo showed that Borrower N had 

business liabilities of $18,170,670 and a net worth of $2,634,903, resulting 


262. In or about August 2009, Borrower N defaulted on the loan. 

263. Hanson's and Sheehan's acts and omissions with respect to the Borrower N Loan 




Because of these negative indicators and because repayment of the Borrower N Loan depended 

upon the sale of the three four-unit townhomes, Defendants' exercise of due care was especially 

important, and yet Defendants failed to consider the borrower's and guarantors' inability to repay 

their debts; they disregarded the LTV ratio violation of the loan policy and the supervisory limit; 

they failed to require any hard equity in the project; and they failed to enforce the Loan Policy's 

limit on the borrower's debt-to-worth ratio. Had Hanson and Sheehan followed prudent, safe, 

and sound lending practices and the Loan Policy, the Bank would not have made the Borrower N 


V. CAUSES OF ACTION 

A. COUNT I — BREACH OF FIDUCIARY DUTY 

264. The FDIC-R re-alleges and incorporates by reference the allegations contained in 

paragraphs 1-263 above as if fully set out in this Count. 

265. As officers of the Bank, at all times, Defendants owed to City Bank the fiduciary 




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duties of care and loyalty, which required them to exercise their powers in good faith and in a 

manner reasonably believed to be in the best interests of the Bank. 

266. Defendants' fiduciary duties included, among other things: conducting the 

business of City Bank in a manner consistent with prudent, safe, and sound lending practices; 

using prudent procedures for approving loans; approving loans in accordance with City Bank's 

Loan Policy; acting with the requisite care in the discharge of their duties; and informing 

themselves, prior to making business decisions, of all the material information reasonably 

available to them. 

267. For each loan, the material information reasonably available to Defendants 

included, among other things, information regarding the reliability and adequacy of the 

repayment sources, the value and sufficiency of the collateral, the creditworthiness of the 

borrowers and guarantors, the LTV ratio, the risks associated with the downturn in the real estate 

market, and any other information necessary to ensure that the proposed loan complied with City 

Bank's Loan Policy and prudent, safe, and sound lending practices. 

268. City Bank reasonably reposed trust and confidence in each Defendant and 

believed each Defendant would exercise that trust and confidence with great care. 

269. Defendants each knew or should have known that the Bank was placing its trust 

and confidence in each of them, and the Bank did place its trust and confidence in each of them, 

as demonstrated by the fact that both Defendants were officers of the Bank and had the 

responsibility to approve loans. 

270. With respect to the Loans, each Defendant possessed significant access to relevant 

knowledge and facts due to each Defendant's special position of power at the Bank and the 

confidence each Defendant invited others to repose in him with respect to such Loans, based on 

the fact that each Defendant actively engaged in the approval of the Loans. 

271. As officers of the Bank, and as individuals approving the Loans, each Defendant 

was in a special position of influence and power, and each of them exercised that influence and 

power in a manner that directly caused harm to the Bank. 



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272. Defendants breached their fiduciary duties to the Bank by committing the acts and 

omissions alleged herein. 

273. As a direct and proximate result of Defendants' breaches of their fiduciary duties, 

Plaintiff has suffered damages in an amount to be proved at trial. 

B. COUNT II — GROSS NEGLIGENCE (Pleaded in the Alternative to Count I) 



275. Under Washington law and 12 U.S.C. § 1821(k), as officers of the Bank, 

Defendants can be held personally liable for damages to City Bank that were caused by their 

gross negligence. 

276. As officers of the Bank, Defendants owed to City Bank a duty to use care, skill, 

and diligence in the performance of their duties. 

277. Defendants' duty of care to City Bank included, among other things: conducting 

the business of City Bank in a manner consistent with prudent, safe, and sound lending practices; 


Loan Policy; and informing themselves, prior to making business decisions, of all the material 

information reasonably available to them. 







279. Defendants breached their duties and were grossly negligent by committing the 

acts and omissions alleged herein. 

280. As a direct and proximate result of Defendants' gross negligence, Plaintiff has 

suffered damages in an amount to be proved at trial. 




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C. COUNT III — NEGLIGENCE (Pleaded in the Alternative to Counts I and II) 



282. Under Washington law, as officers of the Bank, Defendants can be held 

personally liable for damages to City Bank caused by their negligence. 

283. As officers of the Bank, Defendants owed to City Bank a duty to use care, skill, 

and diligence in the performance of their duties. 

284. Defendants' duty of care to City Bank included, among other things: conducting 

the business of City Bank in a manner consistent with prudent, safe, and sound lending practices; 


Loan Policy; and informing themselves, prior to making business decisions, of all the material 

information reasonably available to them. 







286. Defendants breached their duties and were negligent by committing the acts and 

omissions alleged herein. 

287. As a direct and proximate result of Defendants' gross negligence, Plaintiff has 

suffered damages in an amount to be proved at trial. 

PRAYER FOR RELIEF 

WHEREFORE, Plaintiff, the Federal Deposit Insurance Corporation as Receiver for City 

Bank, demands a trial by jury and judgment in its favor against Defendants as follows: 

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1. For compensatory damages and other damages, jointly and severally, against 

Defendants for their negligence, gross negligence, and/or breaches of fiduciary 

duty that resulted in damages; 

2. For prejudgment and other appropriate interest pursuant to 12 U.S.C. § 1821(1) 

and Washington law; 

3. Such other and further relief as the Court deems just and proper; and 

4. Plaintiff demands a trial by jury on all issues. 

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Dated: April 15, 2013 

Respectfully Submitted, 


By: s/ Stephen J. Kennedy 

Stephen J. Kennedy, WSBA No. 16341 

sikaterwynne.com 

601 Union Street, Suite 1501 

Seattle, WA 98101-3981 

Telephone: (206) 623-4711 

Fax: (206) 467-8406 

Attorneys for Plaintiff 




SEATTLE, WA 98101-3981 

(206) 623-4711

FDIC as Receiver for City Bank vs. Conrad D. Hanson and ...

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